Question

For a hypothetical economy, assuming there is an increase in the marginal Propensity to Consume (MPC) from 75% to 90% and change in investment to be ₹ 1,000 crore.
Using the concept of investment multiplier, calculate the increase in income due to change in Marginal Propensity to Consume (MPC).

Answer 1

`"Multiplier" (k) = (1/(1-MPC))=1/(1-0.80) = 1/0.20 = 5`

`"We also know K" = "Changes in Income (ΔY)"/"Change in Investment (Δl)"`

Given: 

Change in Investment (Δl) + Rs. 1000 cr or es

`5 = ("Change in Income" (ΔY))/1000`

Change in Income (ΔY) = Rs. 5,000 crore