Question

An increase in investment by Rs. 5,000 crores leads to increase in national Income Which is four times more than the increase in investment. Calculate marginal propensity to save. (0.20)

Answer 1

Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.

Multiplier(k) => Change in income / change ininvestment = 1/ MPS

=> 4 = 1/MPS

=> MPS = 1/4

=> MPS= 0.25.