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Question
For a hypothetical economy, assuming there is an increase in the Marginal Propensity to Consume from 80% to 90% and change in investment to be ₹ 2000 crore.
Using the concept of investment multiplier, calculate the increase in income due to change in Marginal Propensity to Consume.
Solution
Given:
Increase in Investment = ΔI = 2,000 crore
MPC = 80% = 0.80 (Before)
MPC = 90% = 0.90 (After)
Increase in Income = ΔY = ?
Investment Multiplier = `k = 1/ (1- "MPC")`
= `1/(1-0.90) = 1/ (0.10)`
= 10 times
Now,
`k = ("ΔY")/("ΔI ")`
10 =`("ΔY")/(2000)`
10 × 2,000 = ΔY
ΔY = 20,000 crore
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