Question

Answer the following question.
In an economy, investment increased by 1,100 and as a result of it income increased by 5,500. Had the marginal propensity to save been 25 percent, what would have been the increase in income? 

Answer 1

In an economy, if the investment increased by 1,100  and had the marginal propensity to save been 25 percent, then the increase in income can be calculated as follows:

`"k" = (1)/"MPS" = (Δ"Y")/(Δ"I")`

`"k" = (1)/(0.25) = (Δ""Y")/(1100)`

or, `(1)/(0.25) = (Δ"Y")/(1100)`

So, ΔY = 4,400

Thus, we can observe that an increase in the investment by Rs 1,100 will result in an increase in income and output by Rs 4,400.