For a hypothetical economy, assuming there is an increase ...

CBSE 2023 Class 12 Economics Outside Delhi Set 1

Question : 19

Total: 52

For a hypothetical economy, assuming there is an increase in the Marginal Propensity to Consume (MPC) from 75% to 90% and change in investment to be ₹1,000 crore.
Using the concept of investment multiplier, calculate the increase in income due to change in Marginal Propensity to Consume (MPC).

Solution:

Given:
Increase in Investment =∆I=1000 crore
‌‌ MPC ‌=75%=0.75‌ (Before) ‌
‌‌ MPC ‌=90%=0.90‌ (After) ‌
Increase in Income =∆Y= ?
‌‌ Investment Multiplier ‌=k=‌

1−MPC

‌=‌

1−0.90

=‌

0.10

‌=10‌ times ‌
‌‌ Now, ‌k‌=‌

∆Y

∆I

10‌=‌

∆Y

1000

10×1,000‌=∆Y
∆Y‌=10,000‌ crore ‌

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