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The Multiplier Mechanism

Suppose margi...

Question

Suppose marginal propensity to consume is 0.8. How much increase in investment is required to increase national income by Rs. 2,000 crore? Calculate.
(Increase in investment = Rs.400 Croce)

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Solution

If MPC= 0.8, then
MPS = 1- MPC = 1-0.8 = 0.2.
Multiplier(k) => 2,000 / change in investment = 1/ MPS

=> 2,000 / change in investment = 1/0.2

=> 2,000 / change in investment = 5

=> change in investment = 2,000 / 5 = Rs. 400 crores.

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