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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
What is marginal propensity to consume?
Given the following data, find the missing value of 'Government Final Consumption Expenditure' and 'Mixed Income of Self Employed'.
| S.No. | Particulars | Amount (In ₹ crores) |
| (i) | National Income | 71,000 |
| (ii) | Gross Domestic Capital Formation | 10,000 |
| (iii) | Government Final Consumption Expenditure | ? |
| (iv) | Mixed Income of Self Employed | ? |
| (v) | Net Factor Income from Abroad | 1,000 |
| (vi) | Net Indirect Taxes | 2,000 |
| (vii) | Profits | 1,200 |
| (viii) | Wages & Salaries | 15,000 |
| (ix) | Net Exports | 5,000 |
| (x) | Private Final Consumption Expenditure | 40,000 |
| (xi) | Consumption of Fixed Capital | 3,000 |
| (xii) | Operating Surplus | 30,000 |
State the meaning of the following:
Autonomous Consumption
In equation C = a + by, the value of b lies between ______.
Consumption depends on ______
Aggregate Demand is not determined by which of the following.
Which of the following statements is true?
Read the following statements carefully:
Statement 1: The consumption curve is an upward sloping straight line curve due to the direct relationship between income and consumption and the assumption of constant Marginal Propensity to Consume.
Statement 2: Aggregate Demand curve and Consumption curve are parallel to each other.
In the light of the given statements, choose the correct alternative from the following:
"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.
At the break-even point level of incomes for the economy is ₹ 10,000 crores and if the people tends to save 20 per cent of their additional income, then calcualte the value of autonomous consumption.
Read the following statements carefully:
Statement 1: Consumption function assumes that, consumption changes at a constant rate as income changes.
Statement 2: Autonomous consumption is the ratio of total consumption (C) to total income (Y).
In 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 ______.
