The consumption function of an economy is given as: C = 40 + 0.8Y. Calculate the total increase in income and consumption if investment expenditure increases by Rs. 500 crores.
(Increase in income =2,500 acres; Increase in Consumption = Rs.2,000 crones)

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Solution

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

=> change in income/ 500 = 1/0.2

=> change in income/ 500 = 5

=> change in income = 5 * 500 = 2500 crores.
Increase in income = MPC (^Y)
= 0.8 * 2500 = 2,000 crores.

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The consumption function of an economy is given as: C = 40 + 0.8Y. Calculate the total increase in income and consumption if investment expenditure increases by Rs. 500 crores. (Increase in income =2,500 acres; Increase in Consumption = Rs.2,000 crones)

Multiplier(k) => Change in income / change ininvestment = 1/ (1- MPC) => change in income/ 500 = 1/0.2 => change in income/ 500 = 5 => change in income = 5 * 500 = 2500 crores. Increase in income = MPC (^Y) = 0.8 * 2500 = 2,000 crores.

The consumption function of an economy is given as: C = 40 + 0.8Y. Calculate the total increase in income and consumption if investment expenditure increases by Rs. 500 crores.
(Increase in income =2,500 acres; Increase in Consumption = Rs.2,000 crones)

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

=> change in income/ 500 = 1/0.2

=> change in income/ 500 = 5

=> change in income = 5 * 500 = 2500 crores.
Increase in income = MPC (^Y)
= 0.8 * 2500 = 2,000 crores.