Question

Suppose for a hypothetical economy: 
\(C = 100 + 0.75Y\) (where \(C =\) Consumption and \(Y =\) Income) 
\(I_0 = 400\) (\(I_0 =\) Autonomous Investment) 
Value of Investment Multiplier (\(K\)) would be _________ . 
(Choose the correct alternative to fill in the blank)

• A. 5
• B. 4
• C. 6
• D. 3

Hint:

Use \(K = \frac{1}{1 - MPC}\) to calculate the investment multiplier. Higher MPC leads to a higher multiplier.

Answer 1

The Correct Option is B

The investment multiplier (\(K\)) is calculated using the formula: \[K = \frac{1}{1 - MPC}\] Given that \(MPC = 0.75\): \[K = \frac{1}{1 - 0.75} = \frac{1}{0.25} = 4\] Therefore, the investment multiplier equals 4.