Question

In an economy, the marginal propensity to save is 0.25. Investment is increased by Rs. 200 crores. Calculate the total increase in income and consumption expenditure.

Answer 1

If the MPS= 0.25 and investment is increased by Rs. 200 crores.

Multiplier(k) => Change in Income / 200 = 1/ MPS

=> Change in Income/ 200 = 1/0.25

=> Change in Income / 200 = 4

=>Change in Income = 4*200 = 800 crores

Consumption at equilibrium level of income,

Income= Consumption+ Investment

=> Y= C+I

=> C= Y-I

=> C = 800-200

= 600 crores