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Question
Answer the following question.
In an economy, investment increased by 1,100 and as a result of it income increased by 5,500. Had the marginal propensity to save been 25 percent, what would have been the increase in income?
Solution
In an economy, if the investment increased by 1,100 and had the marginal propensity to save been 25 percent, then the increase in income can be calculated as follows:
`"k" = (1)/"MPS" = (Δ"Y")/(Δ"I")`
`"k" = (1)/(0.25) = (Δ""Y")/(1100)`
or, `(1)/(0.25) = (Δ"Y")/(1100)`
So, ΔY = 4,400
Thus, we can observe that an increase in the investment by Rs 1,100 will result in an increase in income and output by Rs 4,400.
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