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

CBSE 2023 Class 12 Economics Outside Delhi Set 3

Question : 3

Total: 5

For a hypothetical economy, assuming there is an increase in the Marginal Propensity to Consume from 80% to 90% and change in investment to be ₹2000 crore.
Using the concept of investment multiplier, calculate the increase in income due to change in Marginal Propensity to Consume.

Solution:

Given:
Increase in Investment =∆I=2,000 crore
‌‌ MPC ‌=80%=0.80‌ (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

2000

10×2000‌=∆Y
∆Y‌=20000‌ crore ‌

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