Question

In an economy investment is increased by Rs. 300 crore. If marginal propensity to consume is 2/3, calculate increase in national income.

Answer 1

Given that

MPC = 2/3 = 0.67

Change in investment (ΔI) = Rs 300crore

We know that

k(multiplier) = 1/(1-MPC) = 1/(1-0.67) = 3.03

k = ΔY/ΔI

3.03 = ΔY/300

ΔY = Rs 909crore