Question

Suppose, the consumption function is given as:
\[ C = 205 + 0.9Y \quad \text{(where C = Total Consumption and Y = National Income)} \]
The value of Investment Multiplier (K) would be ................
(Choose the correct option to fill in the blank)

• A. 0.09
• B. 10.0
• C. 0.9
• D. 9.0

Hint:

The higher the Marginal Propensity to Consume (MPC), the higher the multiplier. Always use the formula:
\[ K = \frac{1}{1 - MPC} \] Autonomous consumption does not affect the multiplier value.

Answer 1

The Correct Option is B

To determine the Investment Multiplier (K), the formula utilizes the Marginal Propensity to Consume (MPC):
\[ K = \frac{1}{1 - MPC} \]
Given the consumption function:
\[ C = 205 + 0.9Y \]
In this equation, 205 represents autonomous consumption, and the coefficient of \( Y \), which is \( 0.9 \), signifies the Marginal Propensity to Consume (MPC).
Therefore:
\[ MPC = 0.9 \]
Substituting the MPC value into the multiplier formula:
\[ K = \frac{1}{1 - 0.9} = \frac{1}{0.1} = \boxed{10.0} \]
The investment multiplier equals 10. Consequently, each investment unit increase leads to a 10-unit increase in national income.