Question

For a hypothetical economy, the government incurs an investment expenditure of ₹ 1,000 crore. If the value of Marginal Propensity to Save (MPS) falls from 0.25 to 0.10. Calculate the value of increase in income due to change in the value of Marginal Propensity to Save (MPS).

Answer 1

Given, Change in Investment (ΔI) = ₹ 1,000 crore

MPS	Investment Multiplier	Change in Income
	K = `bb(1/(MPS))`	(ΔY) ΔY = K × ΔI (₹ in crore)
0.25	`1/0.25` = 4	4 × 1,000 = 4,000
0.10	`1/0.10` = 10	10 × 1,000 = 10,000

Increase in Income (ΔY) = 10,000 – 4,000 = ₹ 6,000 crore