If the value of Investment Multiplier is 5 and the increased income is ₹ 800 crore in an economy, then find the value of change in the investment in the economy.
₹ 160 crore
Understanding the Investment Multiplier and its Calculation
The Investment Multiplier is a key concept in macroeconomics that explains how an initial change in investment can lead to a much larger change in national income. It quantifies the multiplying effect of investment on the economy's income level.
Problem Setup: Given Information
We are given the following values:
- Value of the Investment Multiplier (\(k\)): 5
- Increased income (\(\Delta Y\)): ₹ 800 crore
We need to find the value of the change in investment (\(\Delta I\)) in the economy.
Formula for the Investment Multiplier
The formula relating the Investment Multiplier (\(k\)), change in income (\(\Delta Y\)), and change in investment (\(\Delta I\)) is:
\(k = \frac{\Delta Y}{\Delta I}\)
Calculating the Change in Investment
To find the change in investment (\(\Delta I\)), we can rearrange the formula:
\(\Delta I = \frac{\Delta Y}{k}\)
Now, we substitute the given values into this formula:
\(\Delta I = \frac{800 \text{ crore}}{5}\)
Performing the division:
\(\Delta I = 160 \text{ crore}\)
Result
The value of the change in the investment in the economy is ₹ 160 crore.
Summary of Calculation Steps
- Identify the given values: Investment Multiplier (\(k\)) = 5, Change in Income (\(\Delta Y\)) = ₹ 800 crore.
- Recall the Investment Multiplier formula: \(k = \frac{\Delta Y}{\Delta I}\).
- Rearrange the formula to solve for Change in Investment: \(\Delta I = \frac{\Delta Y}{k}\).
- Substitute the given values into the rearranged formula.
- Calculate the result: \(\Delta I = \frac{800}{5} = 160\).
Revision Table: Key Multiplier Concepts
| Concept | Definition | Formula | Relationship with Multiplier |
|---|---|---|---|
| Investment Multiplier (\(k\)) | The ratio of the change in national income to the initial change in investment. | \(k = \frac{\Delta Y}{\Delta I}\) | Directly related to MPC, inversely related to MPS. |
| Marginal Propensity to Consume (MPC) | The proportion of an increase in income that is spent on consumption. | \(\text{MPC} = \frac{\Delta C}{\Delta Y}\) | \(k = \frac{1}{1 - \text{MPC}}\) |
| Marginal Propensity to Save (MPS) | The proportion of an increase in income that is saved. | \(\text{MPS} = \frac{\Delta S}{\Delta Y}\) | \(k = \frac{1}{\text{MPS}}\) |
| Change in Income (\(\Delta Y\)) | The total increase in national income resulting from an initial change in investment. | \(\Delta Y = k \times \Delta I\) | Result of the multiplier effect on the initial investment change. |
| Change in Investment (\(\Delta I\)) | The initial autonomous increase in investment in the economy. | \(\Delta I = \frac{\Delta Y}{k}\) | The trigger for the multiplier process. |
Additional Information: The Multiplier Effect
The multiplier effect describes how an initial injection into the economy (like investment, government spending, or exports) causes a ripple effect, leading to a larger final increase in national income.
Key points about the Investment Multiplier:
- The size of the Investment Multiplier depends on the Marginal Propensity to Consume (MPC) or the Marginal Propensity to Save (MPS). Since \(\text{MPC} + \text{MPS} = 1\), the formulas \(k = \frac{1}{1 - \text{MPC}}\) and \(k = \frac{1}{\text{MPS}}\) are equivalent.
- A higher MPC (or lower MPS) leads to a larger multiplier, meaning a given change in investment will result in a greater change in income.
- In this problem, since the multiplier is 5, an initial investment of ₹ 160 crore leads to an increase in income 5 times larger, which is ₹ 800 crore.
- The multiplier effect assumes there are no leakages from the circular flow of income other than saving, and that there is spare capacity in the economy.
Understanding the Investment Multiplier is crucial for analyzing how changes in investment can impact the overall level of economic activity and national income.
Important Questions from Economics and Central Problems of Economy
Which of the following statements are true?
(A) Quantitative tools control the extent of money supply by changing the CRR.
(B) There are two types of open market operations – outright and upright.
(C) A fall in the bank rate can decrease the money supply.
(D) Selling of a bond by RBI leads to reduction in quantity of reserves.
(E) The RBI can influence money supply by changing the rate at which it gives loan to the commercial banks.
Choose the correct answer from the options given below:
Paradox of Thrift means :
Match List-I with List-II:
List-I List-II (A) Bank Rate (I) Securities are pledged in order to repurchase (B) Marginal Standing Facility (II) Minimum rate at which funds are provided for long term (C) Repo Rate (III) Also known as Penal Interest Rate (D) Reverse Repo Rate (IV) Central Bank borrows funds from commercial banks Choose the correct answer from the options given below:
Which of the following is not a function of Central Bank ?
Article 112 deals with :
