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Question
In an economy, the value of Marginal Propensity to Save (MPS) is 0.25, what will be the value of increase in income, if investments increased by ₹ 200 crores?
Options
₹ 200 crores
₹ 150 crores
₹ 1,000 crores
₹ 800 crores
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Solution
₹ 800 crores
Explanation:
Given: Increase in Investment = ΔI = 200 crore
MPS = 0.25
To Find: Increase in Income = ΔY =?
Here,
MPC + MPS = 1
MPC + 0.25 = 1
MPC = 1 - 0.25 = 0.75
Investment Multiplier = `k = 1/(1 - "MPC")`
=`1/(1 - 0.75) = 1/ (0.25)`
= 4
Now, `k = "ΔY"/"ΔI"`
4 = `"ΔY"/200`
`4xx200` = ΔY
ΔY = ₹ 800 crore
RELATED QUESTIONS
State the meaning of the following:
Autonomous Consumption
Aggregate Demand is not determined by which of the following.
Which of the following statements is true?
"In an economy, the autonomous consumption is ₹ 100 and Marginal Propensity to Consume (MPC) is 0.6. If the equilibrium level of Income is 2,000, then the autonomous investment is ₹ 300." Justify the statement with valid calculation.
Read the following statements carefully:
Statement 1: The induced consumption shows, the direct relation between consumption and income.
Statement 2: With a certain increase in income, induced consumption also increases.
In the light of the given statements, choose the correct alternative from the following:
If in an economy, the Investment Multiplier is 4 and Autonomous Consumption is ₹ 30 crore, the relevant consumption function would be ______.
What does the consumption function show?
At zero income, what happens to consumption?
What is induced consumption?
Which expression represents induced consumption in the consumption function?
Which formula correctly defines Marginal Propensity to Consume (MPC)?
Which equation is equivalent to \[MPC+MPS=1\]?
What does \[APC=\frac{C}{Y}\] measure?
What is saving at a point where income equals consumption on the 45° line?
What does it mean when the consumption curve is below the 45° line?
What does it mean when the consumption curve is above the 45° line?
For the consumption function \[C=100+0.8Y\], what is autonomous consumption?
