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CBSE 2017 Class 12 Economics Delhi Set-1

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Question : 18 of 18
Marks: +1, -0
Assuming that increase in investment is ₹ 1000\text{₹ 1000} crore and marginal propensity to consume is 0.9 . Explain the working of multiplier.
Solution:  
Given that
Value of MPC=0.9\text{MPC}=0.9
Initial increase in investment =₹ 1000=\text{₹ 1000} crore
So, every increase of ₹ 1\text{₹ 1} in the income, 0.9 part of the increased income will be consumed by people.
Consumption =₹ 0.90=\text{₹ 0.90}
Saving =₹ 0.10=\text{₹ 0.10}
It is given that initial increase in investment of ₹ 1000\text{₹ 1000} will lead to change in the income by ₹ 1000\text{₹ 1000} in the first round. As MPC is 0.9 so people will consume 0.9 of the increased income i.e., ₹ 900\text{₹ 900} there by saving ₹ 100\text{₹ 100}. In the next round due to increase in the consumption expenditure by ₹ 900\text{₹ 900} there will be an increase in income by ₹ 900\text{₹ 900}. Then people will again spend the increased income i..., ₹ 810\text{₹ 810} and save the rest part of the income ₹ 90\text{₹ 90}. Similarly, this process will continue and the income will go on increasing as a result of the increase in consumption. The total change in the income is ₹ 10,000\text{₹ 10,000} and the change in the investment will be ₹ 1,000\text{₹ 1,000}.
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