The investment expenditure of an economy changes by N2 million and MPC is 0.75
What is the change in income?
N0.5m
N1.5m
N2.6m
N8.0m
Explanation
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Mathematically, the INVESTMENT MULTIPLIER is a function of two main factors:
The Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS).
According to John Maynard Keynes,
Investment= Consumption= Spending= Expenditure.
Thus, the same formula for Investment is applicable to Consumption.
Marginal Propensity to Consume (MPC) = 0.75
The formula for MPC is;
MPC= total change in Consumption ÷ total change in National Income
MPC= ∆C ÷ ∆Y
Where C = Total Consumption and Y = Total National Income.
NB: ∆C = ∆I = N2m
Therefore change in income (i.e, using MPC) is;
MPC = ∆C ÷ ∆Y
0.75 = 2 ÷ ∆Y
Multiply both sides by ∆Y:
0.75 = 2 ÷ ∆Y
0.75∆Y = 2
Divide both sides by 0.75:
0.75∆Y = 2
∆Y = 2 ÷ 0.75
∆Y = 2.67m
i.e, N2.67m
The correct answer is likely to be option C:
A. N0.5m
B. N1.5m
C. N2.6m
D. N8.0m
14-05-23; 5:58pm
∆ in income (∆Y)= ?
MPC= 0.75
∆ in inyestment(∆I)= 2m
K= 1/1-0.75
K= 1/0.25
K= 4
Note: K= ∆Y/∆I
so we substitute
4= ∆Y/2
cross multiply
∆Y= 8m
Answer is D.
