Question

In an economy, people always consume half of any additional income and save the other half. Determine the additional income generated if government makes an additional expenditure of Rs. 20,000 crores.
(Additional Income Generated = Rs.40,000 stores)

Answer 1

If half of the income is saved, then MPS= 0.5.

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

=> change in income/ 20,000 = 1/0.5

=> change in income/ 20,000 = 2

=> change in income = 5 * 20,000 = 40,000 crores.