Income Determination Test - 22

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Multiplier(k) => Change in income / change in investment = 1/ MPS(s) where s is the marginal propensity to save. 

If MPS= 0.20 and change in investment is by Rs. 400 crores, then 

Multiplier(k) => Change in income / change in investment = 1/ MPS 

                     => change in income/ 400 = 1/0.20

                     => change in income/ 400 = 5

                     => change in income = 5 * 400 = 2000 crores. 

Therefore, Income is increased by Rs. 2000 crores. 

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Multiplier(k) => Change in income / change in investment = 1/ {1-MPC(c)} where c is the marginal propensity to consume.

If MPC = 1, then 

Multiplier(k)= 1/(1-1)= 1/0 = Infinity.

Therefore, the value of the multiplier is infinity. 

The over full employment equilibrium refers to the situation when the aggregate demand in the economy is equal to aggregate supply beyond the full employment level which means that the excess demand in the economy leads to high price and over utilization of resources. 

Aggregate Demand refers to the desired level of expenditure in the economy during an accounting year. It is what people wish to spend on the purchase of goods and services during an accounting year.

The Ad curve in income determination analysis represents a two sector economy which only includes the expenditure made by the consumer sector and the producer sector.

Therefore, aggregate demand = consumption + investment = C + I.

When Aggregate demand  is more than Aggregate supply, then the planned inventory would fall below the desired level as the demand is more than the supply in the market. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in AS and rise in income means rise in AD. 

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Multiplier(k) => Change in income / change in investment = 1/ {1-MPC(c)} where c is the marginal propensity to consume.

If MPC = 0, then 

Multiplier(k)= 1/(1-0)= 1/1 = 1

Therefore, the value of the multiplier is 1. 

Some of the motives that affect a persons consumption decision are: 

If income in terms of wage rate increases, then consumption expenditure also increases which is called the wage-price spiral where the wages are increased due to excessive price in the economy and price in increased due to excessive wage and consumption demand in the economy. 

Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value. 

C= c+ bY where c=autonomous consumption, b= marginal propensity to consume, and Y= income.