Question

Find incremental investment when equilibrium GDP increases by Rs 50,000 and half of additional income is always saved in the economy.

• A. Rs 25,000
• B. Rs 35,000
• C. Rs 15,000
• D. Rs 50,000

Answer 1

The correct option is A

Rs 25,000

Change in savings $=50,000\times \frac{1}{2}=25,000$

We know, $MPS=\frac{\Delta S}{\Delta Y}=\frac{25,000}{50,000}=0.5$

We know,

Multiplier $\left(M\right)=\frac{1}{1-MPC}=\frac{1}{MPS}$

Or, $M=\frac{\Delta Y}{\Delta I}$

Now, MPS = 0.5, we get $\Delta I=\frac{\Delta Y}{M}$

$=\frac{50,000}{2}=25,000$ $[M=\frac{1}{MPS}=\frac{1}{0.5}=2]$

Increase in GDP by Rs 50,000 is caused by increase in investment of Rs 25,000.