Question

If an economy plans to increase its income by ₹ 2,000 crore and the Marginal Propensity to Consume is 75%. Estimate the increase in investment required to achieve the targeted increase in income.

Answer 1

Given, MPC = 0.75, ΔY = ₹ 2,000 Crore

K = `1/(1 - "MPC")`

= `1/(1 - 0.75)`

= `1/(1 - 0.25)`

= 4

According to the question:

K = `(Δ"Y")/(Δ"I")`

4 = `2000/(Δ"I")`

ΔI = `2000/4`

= ₹ 500 Crore

Therefore, increase in investment (ΔI) required = ₹ 500 Crore.