How much additional income will be generated in an economy with an additional investment of Rs. 100 crores and when half of increase in Income is spent on consumption?

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Solution

If half of the increase in income is spend on consumption then MPC = 0.5
Multiplier(k) => Change in income / change ininvestment = 1/ (1-MPC)

=> change in income/ 100 = 1/ 0.5
=> change in income/ 100 = 2

=> change in income = 2 * 100 = 200 crores.

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