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Question
In an economy investment is increased by Rs. 300 crore. If marginal propensity to consume is 2/3, calculate increase in national income.
Solution
Given that
MPC = 2/3 = 0.67
Change in investment (ΔI) = Rs 300crore
We know that
k(multiplier) = 1/(1-MPC) = 1/(1-0.67) = 3.03
k = ΔY/ΔI
3.03 = ΔY/300
ΔY = Rs 909crore
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