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The Multiplier Mechanism

It is planned...

Question

It is planned to increase national income by Rs. 1,000 crores. How much increase in investment is required to achieve this goal? Assume that marginal propensity to consume is 0.6. Calculate.

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Solution

When MPC= 0.6,
Multiplier(k) => 1,000 / change in investment= 1/ (1-MPC)

=> 1,000 / change in investment= 1/0.4

=> 1,000 / change in investment = 2.5

=> change in investment= 1,000 /2.5 = 2,500 crores.

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