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# Assuming that 'Increase' in Investment is Rs 900 Crore and Marginal Propensity to Consume is 0.6. Explain the Working of Multiplier. - CBSE (Arts) Class 12 - Economics

ConceptEffects of Shifts in Demand and Supply

#### Question

Assuming that 'increase' in investment is Rs 900 crore and marginal propensity to consume
is 0.6. explain the working of the multiplier.

#### Solution

Given that

Value of MPC = 0.6

An initial increase in investment = Rs 900 crore

So, every increase of Re 1 in the income, 0.6 part of the increased income will be consumed by people.

Consumption= Rs 0.60

Saving= Rs 0.40

 Round Increase ininvestmentΔI Change inincome ΔY Induced changein consumptionΔC SavingsΔS 1 900 900 540 360 2 540 324 216 3 324 194.4 129.6 4 194.4 116.64 77.76 5 116.64 69.98 46.66 6 69.98 41.99 27.99 7 41.99 25.19 16.8 8 25.19 15.11 10.08 9 15.11 9.06 6.05 10 9.06 5.44 3.62 11 5.44 3.26 2.18 12 3.26 1.95 1.31 13 1.95 1.17 0.78 14 1.17 0.7 0.47 15 0.7 0.42 0.28 Total 2,250 1,350 900

The above shows the process multiplier which continues and the income will increase due to increase in consumption.

Changes in the income (AY)= Rs 2,25

Change in the investment (Al)= Rs 900

k = 1/(1-MPC) = (ΔY)/(ΔI)

k = 1/(1- 0.6) = (ΔY)/900

1/0.4 = (ΔY)/900

ΔY = 2250

Hence, an initial increase in the investment by 900 crore lead to an increase in income and output by its 2,250 crore.

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Solution Assuming that 'Increase' in Investment is Rs 900 Crore and Marginal Propensity to Consume is 0.6. Explain the Working of Multiplier. Concept: Effects of Shifts in Demand and Supply.
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