Question

Suppose for an economy, government proposes investment projects for construction of expressways with an incremental investment of ₹ 2400 crore. Assuming 80% of increase in income is spent on consumption.

Estimate the following on the basis of above information:

1. Change in income (ΔY). [2]
2. Change in consumption (ΔC). [2]

Answer 1

To estimate the change in income (ΔY) and change in consumption (ΔC) for the given economy:

• Incremental Investment (ΔI): ₹ 2400 crore
• Marginal Propensity to Consume (MPC):
  80% of income is spent on consumption → MPC = 0.8

⇒ Investment Multiplier (k):

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

k = `1 / (1 - 0.8)`

∴ k = 5

⇒ Change in Income (ΔY):

ΔY = k × ΔI

⇒ Change in Consumption (ΔC):

ΔC = MPC × ΔY

1. Change in Income (ΔY):
   ΔY = 5 × 2400
   = ₹ 12,000 cr.
2. Change in Consumption (ΔC):
   ΔC = 0.8 × 12,000
   = ₹ 9,600 cr.