Question

Suppose for an economy, government proposes two investment projects for construction of expressways with an additional investment of ₹ 2000 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

Given in the question:

Additional investment (ΔI) = ₹ 2000 crore

Marginal Propensity to Consume (MPC) = 80% or 0.8 (since 80% of the increase in income is spent on consumption)

Change in Income (ΔY):

By using the multiplier formula:

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

K = `1 / (1 - 0.8)`

∴ K = 5

Now the change in income

ΔY = K × ΔI

= 5 × 2000

= 10000 cr.

Change in Consumption (ΔC)

ΔC = MPC × ΔY

= 0.8 × 10000

= 8000 cr.