Question

For a hypothetical economy, assuming there is an increase in the Marginal Propensity to Consume from 80% to 90% and change in investment to be ₹ 2000 crore. 

Using the concept of investment multiplier, calculate the increase in income due to change in Marginal Propensity to Consume.

Answer 1

Given:

Increase in Investment = ΔI = 2,000 crore

MPC = 80% = 0.80 (Before)

MPC = 90% = 0.90 (After)

Increase in Income = ΔY  = ?

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

= `1/(1-0.90) = 1/ (0.10)`

= 10 times

Now,

`k = ("ΔY")/("ΔI ")`

10 =`("ΔY")/(2000)`

10 × 2,000 = ΔY

ΔY = 20,000 crore