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Question
When National Income rises from ₹ 600 Cr. to ₹ 1000 Cr., the consumption expenditure increases from ₹ 500 Cr. to ₹ 800 Cr. Calculate MPC and hence the value of Investment Multiplier.
Solution
Given:
National Income rises from ₹ 600 cr. to ₹ 1000 cr., therefore ΔY = 400 cr.
The consumption expenditure increases from ₹ 500 cr. to ₹ 800 cr. therefore ΔC = 300 cr.
The marginal propensity to consume (MPC) is calculated by dividing the change in consumption by the change in income.
∴ `"MPC" = ((Δ"C")/(Δ"Y"))`
= `((800 - 500)/(1,000 - 600))`
= `300/400`
= 0.75
The Investment Multiplier (k) is calculated as
`1/(1 - "MPC")`
∴ `"k" = 1/(1 - 0.75)`
= `1/0.25`
= 4
Hence, the MPC is 0.75 and the invested multiplier is 4.
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