Question

(I) Suppose in an economy, the Marginal Propensity to Consume (MPC) is 0.8. The government introduced an investment project of ₹ 1,000 crore which led to a manyfold increase in National Income (Y) and Consumption Expenditure (C). Estimate:

1. Value of Investment Multiplier (k)
2. Missing Values of (i) and (ii)

Rounds	Change in Investment (ΔI)	Change in Income (ΔY)	Change in Consumption (ΔC)	Change in Savings (ΔS)
I	1,000	1,000	800	200
II		800	640	160
...		...	...	...
...		...	...	...
		(I)	(II)	1,000

(II) “Sum of the Average Propensity to Consume (APC) and Average Propensity to Save (APS) is always equal to one.”

Justify the given statement with the help of a suitable argument.

Answer 1

(I)

(a) Investment Multiplier (k) = `1/(1 - "MPC")`

= `1/(1 - 0.8)`

= 5

(b) (i) Change in Income (∆Y) = k × ∆I

= 5 × 1,000

= ₹ 5,000 crore

(ii) Change in Consumption (∆C) = MPC × ∆Y

= 0.8 × 5,000

= ₹ 4,000 crore

(II)

Income is either consumed or saved, i.e.;

Y = C + S   ...(i)

Dividing both sides of the equation (i) by Y

`Y/Y = C/Y + S/Y`

1 = APC + APS

Thus, sum of the Average Propensity to Consume (APC) and Average Propensity to Save (APS) is always equal to one.