The saving function of an economy is given as: $S = - 40 + 0.4 (Y)$ . Calculate the total increase in income if investment expenditure increases by $R s .700$ crores.

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Solution

Saving function is S= s + Y(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and Y= income. Comparing it to S=−40+0.4(Y), MPS= 0.4.
Multiplier(k) => Change in income / change ininvestment = 1/ MPS
=> change in income/ 700 = 2.5
=> change in income = 2.5 * 700 = 1750 crores.

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The saving function of an economy is given as: S=−40+0.4(Y). Calculate the total increase in income if investment expenditure increases by Rs.700 crores.

Saving function is S= s + Y(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and Y= income. Comparing it to S=−40+0.4(Y), MPS= 0.4.Multiplier(k) => Change in income / change ininvestment = 1/ MPS => change in income/ 700 = 2.5 => change in income = 2.5 * 700 = 1750 crores.

The saving function of an economy is given as: $S = - 40 + 0.4 (Y)$ . Calculate the total increase in income if investment expenditure increases by $R s .700$ crores.

Saving function is S= s + Y(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and Y= income. Comparing it to S=−40+0.4(Y), MPS= 0.4.
Multiplier(k) => Change in income / change ininvestment = 1/ MPS
=> change in income/ 700 = 2.5
=> change in income = 2.5 * 700 = 1750 crores.