Question

Complete the following table :

Situation	Change in Investment (ΔI)	Change in Income (ΔY)	Marginal Propensity to Consume (MPC)	Investments Multiplier (K)
(a)	1000	(i) __________	0.9	(ii) __________
(b)	(iii) __________	4400	(iv) __________	4
(c)	1200	(v) __________	0.8	(vi) __________

Hint:

Use K = 1/(1 - MPC) and K = change in income / change in investment. Find the missing value in each row from the two given values.

Answer 1

Step 1: Understanding the Concept:
The investment multiplier (K) tells us how many times income rises for each unit of rise in investment.
It links three things: the change in investment, the change in income and the marginal propensity to consume (MPC).

Step 2: Key Formula or Approach:
1. \( K = \dfrac{\Delta Y}{\Delta I} \).
2. \( K = \dfrac{1}{1 - MPC} \).
We use the first formula when income and investment are known. We use the second when MPC is known.

Step 3: Situation (a): find (i) and (ii).
Here \(\Delta I = 1000\) and MPC = 0.9.
\[ K = \frac{1}{1 - 0.9} = \frac{1}{0.1} = 10 \]
\[ \Delta Y = K \times \Delta I = 10 \times 1000 = 10000 \]
So (i) = 10000 and (ii) = 10.

Step 4: Situation (b): find (iii) and (iv).
Here \(\Delta Y = 4400\) and K = 4.
\[ \Delta I = \frac{\Delta Y}{K} = \frac{4400}{4} = 1100 \]
\[ 4 = \frac{1}{1 - MPC} \Rightarrow 1 - MPC = \frac{1}{4} = 0.25 \Rightarrow MPC = 0.75 \]
So (iii) = 1100 and (iv) = 0.75.

Step 5: Situation (c): find (v) and (vi).
Here \(\Delta I = 1200\) and MPC = 0.8.
\[ K = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5 \]
\[ \Delta Y = 5 \times 1200 = 6000 \]
So (v) = 6000 and (vi) = 5.

Step 6: The completed table.

Situation	\(\Delta I\)	\(\Delta Y\)	MPC	K
(a)	1000	10000	0.9	10
(b)	1100	4400	0.75	4
(c)	1200	6000	0.8	5

Final Answer:
(i) 10000, (ii) 10, (iii) 1100, (iv) 0.75, (v) 6000, (vi) 5. Each blank is worth half a mark.