Question

In an economy, with every increase in income, 70 per cent of the increased income is spent on consumption. Suppose a fresh investment of Rs. 300 crores takes place In the economy. Calculate the following:
(i) Change in the income; (ii) Change in saving.
(iii) Change in Income = Rs. 1,000 stores; (iv) Change in saving = Rs. 300 stores)

Answer 1

If 70 % of the income is spend on consumption, then MPC= 0.7

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

=> change in income/ 300 = 1/ 0.3

=> change in income/ 300 = 10/3

=> change in income = 3000/3 = 1,000 crores.

(i) Change in income= 1,000 crores

MPS= 1-MPC= 1- 0.7 = 0.3

(ii) Change in savings = MPS ( ^1,000) = 300 crores.