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Question
For a hypothetical economy, the government incurs an investment expenditure of ₹ 1,000 crore. If the value of Marginal Propensity to Save (MPS) falls from 0.25 to 0.10. Calculate the value of increase in income due to change in the value of Marginal Propensity to Save (MPS).
Solution
Given, Change in Investment (ΔI) = ₹ 1,000 crore
| MPS |
Investment Multiplier |
Change in Income |
|
K = `bb(1/(MPS))` |
(ΔY) |
|
| 0.25 | `1/0.25` = 4 | 4 × 1,000 = 4,000 |
| 0.10 | `1/0.10` = 10 | 10 × 1,000 = 10,000 |
Increase in Income (ΔY) = 10,000 – 4,000 = ₹ 6,000 crore
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