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 - 0.75)`

= `1/0.25`

= 4

The relationship between the multiplier, change in investment (ΔI), and initial change in income (ΔY₁) is:

ΔY₁ = K₁ × ΔI

= 4 × 1000

= 4000

For MPC₂ = 0.90

K₂ = `1/(1 - 0.90)`

= `1/0.10`

= 10

The new change in income (ΔY₂) generated by the same investment is:

ΔY₂ = K₂ × ΔI

= 10 × 1000

= 10000

Increase in Income = ΔY₂ − ΔY₁

= 10000 − 4000

= 6000 crore