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Question
If in an economy :
Change in initial Investment (∆I) = ₹ 700 crores
Marginal Propensity to Save (MPS) = 0.2
(a) Investment Multiplier (k)
(b) Change in final income (∆Y)
Solution
(a) We know,
`k = 1/(MPS) = 1/0.2 = 5`
So, investment multiplier is 5.
(b) We also know,
`k = (∆"Y")/(∆"I")`
`5 = (∆"Y")/(700)`
∆Y = 3,500
So, change in income is ₹ 3,500 crores
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