Question

If Planned Investments = 100 crore and consumption function, C = 50 + 0.50 Y, determine the equilibrium level of income and calculate the value of Investment Multiplier.

Options:
Option 1: Equilibrium income = 400 crore; Investment Multiplier = 2
Option 2: Equilibrium income = 200 crore; Investment Multiplier = 1
Option 3: Equilibrium income = 300 crore; Investment Multiplier = 3
Option 4: Equilibrium income = 500 crore; Investment Multiplier = 4

Answer 1

The equilibrium level of income is 100 crore and the value of the Investment Multiplier is 2.

Step-by-step explanation:

The equilibrium level of income can be determined by setting Planned Investments equal to the consumption function:

Planned Investments = Consumption

100 crore = 50 + 0.50Y

0.50Y = 100 - 50

0.50Y = 50

Y = 50 / 0.50

Y = 100

Therefore, the equilibrium level of income is 100 crore.

The value of the Investment Multiplier can be calculated by using the formula: Multiplier = 1 / (1 - MPC)

Where MPC is the Marginal Propensity to Consume

In this case, the consumption function is C = 50 + 0.50Y, so the MPC is 0.50

Multiplier = 1 / (1 - 0.50)

Multiplier = 1 / 0.50

Multiplier = 2

Therefore, the value of the Investment Multiplier is 2.