Question

For a hypothetical economy, assuming there is an increase in the Marginal Propensity to Consume (MPC) from 80% to 90% and change in investment to be ₹ 1000 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 = ₹ 1,000 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")/ (1,000)`

10 × 1,000 = ΔY

ΔY = 10,000 crore