Question

In an economy, the investment expenditure is increased by Rs. 2,000 crores. Calculate the total increase in income and consumption expenditure if ratio of marginal propensity to consume and marginal propensity to save is 4:1.
(Increase in income = Rs. 10,000 cores; Increase in Consumption Expenditure = Rs. 8,000 mores)

Answer 1

MPC / MPS = 4/1

=> MPC = 4 MPS

We know that, MPC + MPS = 1

=> 4 MPS + MPS = 1

=> 5 MPS = 1

=> MPS = 1/5 = 0.2.

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

=> change in income/ 2000 = 1/0.2

=> change in income/ 2000 = 5

=> change in income = 5 * 2000 = 10,000 crores.

Increase in income = MPC (^Y)

= 0.8 * 10,000 = 8,000 crores.