Question

Given marginal propensity to save 0.25, what will be the increase in national income if investment increases by Rs. 125 crores. Calculate

Answer 1

If investment increases by 125 crores and MPS= 0.25, then

Multiplier(k) => Change in income / 125= 1/ MPS

=> Change in income/ 125 = 1/0.25

=> Change in income / 125 = 4

=> change in income = 4(125) = 500 crores.

Hence, National income increases by 500 crores.