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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

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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 in
investment
ΔI
Change in
income ΔY
Induced change
in consumption
ΔC
Savings
ΔS
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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