question_answer

In an economy, investment increases by Rs.100 crore. As a result, income increase by Rs.250 crore. What is the value of multiplier? What does this imply?

Answer:

Given, Increase in Investment\[(\Delta I)\]=Rs.100 crore; Increase in Income\[(\Delta Y)\]= Rs.250 crore We know that, Investment Multiplier (K)=\[\frac{\Delta \,\,Y}{\Delta \,\,I}\Rightarrow \frac{\Delta \,\,Y}{\Delta \,\,I}=\frac{250}{100}=2.5\] This implies that for every unit increase in investment, income increases 2.5 times.