In an economy, the government makes some additional investment. Find its value w

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In an economy, the government makes some additional investment. Find its value when MPC = 0.5 and increase in income = Rs 1,000.

Options:

A . Rs 500

B . Rs 1,000

C . Rs 1,500

D . Rs 100

Answer: Option A
:
A
We know,
M (multiplier)

= \frac{Δ Y}{Δ I}

We also know that,

K = \frac{1}{1 - M P C}

Substituting the value of MPC,

K = \frac{1}{1 - 0.5} = \frac{1}{0.5} = 2

We know,

K = \frac{Δ Y}{Δ I}

and

Δ Y = 1, 000

Thus,

\frac{1, 000}{Δ I} = 2

∴

Δ I = \frac{1, 000}{2} = 500

Additional investment by the government = Rs 500.

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