Question

In an economy, 75 per cent of the increase in income is spent on consumption, Investment is increased by Rs 1,00 crore. Calculate :

(i) Total increase in income.

(ii) Total increase in consumption expenditure.

• A. (i) Rs 4,000 crore
  (ii) Rs 3,000 crore
• B. (i) Rs 3,000 crore
  (ii) Rs 3,000 crore
• C. (i) Rs 3,000 crore
  (ii) Rs 4,000 crore
• D. (i) Rs 5,000 crore
  (ii) Rs 3,000 crore

Answer 1

The correct option is A

(i) Rs 4,000 crore
(ii) Rs 3,000 crore

(i) 75 per cent of the increase in income is spent on consumption.

$\therefore$ $MPC=\frac{\Delta C}{\Delta Y}=\frac{75}{100}=0.75$

Multiplier $\left(M\right)=\frac{1}{1-MPC}=\frac{1}{1-0.75}=\frac{1}{0.25}=4$

We know, $M=\frac{\Delta Y}{\Delta I}$

$\Rightarrow$ $\Delta Y=M\times \Delta I$

$\Delta Y=4\times 1,000=4,000$

(ii) Increase in consumption expenditure $\left(\Delta C\right)=MPC.\Delta Y$

$=0.75\times 4,000$ $(\because MPC=\frac{\Delta C}{\Delta Y}),$ so that $\Delta C=MPC.\Delta Y)$

$=\frac{75}{100}\times 4,000=3,000$

(i) Total increase in income = Rs 4,000 crore.

(ii) Total increase in consumption expenditure = Rs 3,000 crore.