Question

In an economy, investment expenditure increases by Rs. 400 crores and marginal propensity to consume is 0.8. Calculate the increase in income and increase in savings.

Answer 1

Multiplier (K) $=\frac{1}{1-\text{MPC}}=\frac{1}{1-0.8}=\frac{1}{0.2}=5$

$\text{MPS}=1-\text{MPC}=1-0.8=0.2$

Increase in Income $=\text{K}\times \Delta \text{I}=5\times 400=\text{Rs.}2,000\text{crores}$

Increase in Savings $=\text{MPS}\times \Delta \text{Y}=0.2\times 2,000=\text{Rs.}400\text{crores}$.