Question

When National Income rises from ₹ 600 Cr. to ₹ 1000 Cr., the consumption expenditure increases from ₹ 500 Cr. to ₹ 800 Cr. Calculate MPC and hence the value of Investment Multiplier.

Answer 1

Given:

National Income rises from ₹ 600 cr. to ₹ 1000 cr., therefore ΔY = 400 cr.

The consumption expenditure increases from ₹ 500 cr. to ₹ 800 cr. therefore ΔC = 300 cr.

The marginal propensity to consume (MPC) is calculated by dividing the change in consumption by the change in income.

∴ `"MPC" = ((Δ"C")/(Δ"Y"))`

= `((800 - 500)/(1,000 - 600))`

= `300/400`

= 0.75

The Investment Multiplier (k) is calculated as

`1/(1 - "MPC")`

∴ `"k" = 1/(1 - 0.75)`

= `1/0.25`

= 4

Hence, the MPC is 0.75 and the invested multiplier is 4.