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Question

In an economy, investment increased by 1,100 and as a result of it, income increased by 5,500. Had the marginal propensity to save been 25 percent, what would have been the increase in income? 
(Increase in Income = 4,400) 


Solution

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

                     => change in income/ 1,100 = 1/0.25 

                     => change in income/ 1,100 = 4

                     => change in income = 4 * 1,100 = 4,400 

Hence, income increases by 4,400.. 


Economics

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