Question

If MPS = 0.20 and investment is increased by Rs. 400 crores, then total Increase in income will be:

• A. Rs. 80 crores
• B. Rs. 2,000 crores
• C. Rs. 500 crores
• D. Rs. 3,200 crores

Answer 1

Answer: (B)

Rs. 2,000 crores

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Multiplier(k) => Change in income / change in investment = 1/ MPS(s) where s is the marginal propensity to save.

If MPS= 0.20 and change in investment is by Rs. 400 crores, then

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

=> change in income/ 400 = 1/0.20

=> change in income/ 400 = 5

=> change in income = 5 * 400 = 2000 crores.

Therefore, Income is increased by Rs. 2000 crores.