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Question
For a hypothetical economy, assuming there is an increase in the Marginal Propensity to Consume (MPC) from 80% to 90% and change in investment to be ₹ 1000 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 = ₹ 1,000 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")/ (1,000)`
10 × 1,000 = ΔY
ΔY = 10,000 crore
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