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Question
If an economy plans to increase its income by ₹ 2,000 crore and the Marginal Propensity to Consume is 75%. Estimate the increase in investment required to achieve the targeted increase in income.
Solution
Given, MPC = 0.75, ΔY = ₹ 2,000 Crore
K = `1/(1 - "MPC")`
= `1/(1 - 0.75)`
= `1/(1 - 0.25)`
= 4
According to the question:
K = `(Δ"Y")/(Δ"I")`
4 = `2000/(Δ"I")`
ΔI = `2000/4`
= ₹ 500 Crore
Therefore, increase in investment (ΔI) required = ₹ 500 Crore.
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