question_answer

An increase of Rs. 250 crore in investment in an economy resulted in total increase in income of Rs. 1,000 crore. Calculate the following:

(i) Value of Multiplier (K)

(ii) Marginal Propensity to Consume (MPC)

(ii) Change in Consumption Expenditure (AC)

(iv) Change in Saving (AS)

Answer:

(i) Calculation of Multiplier Increase in Investment\[(\Delta I)\]= Rs. 250 crore                                Increase in Income\[(\Delta Y)\]=Rs.1,000 crore  \[Value\,of\,multiplier(K)=\frac{Increase\,in\,Income(\Delta Y)}{Increase\,in\,Investment(\Delta I)}\]                                      \[=\frac{1,000}{250}=4\]                                                    (ii) Calculation of Marginal Propensity to Consume                                                                   \[Multiplier(K)=\frac{1}{1-MPC}\]                                     \[4=\frac{1}{1-MPC}\]                                     \[4\,\,(1-MPC)=1\]                                     \[4-4MPC=1\]                                     \[4-1=4MPC\]                                     \[\frac{3}{4}=0.75=MPC\] i.e. Marginal propensity to consume = 0.75                                                (iii) Calculation of Change in Consumption Expenditure                                                    \[M\operatorname{arginal}\,Propensity\,to\,Consume(MPC)=\frac{Change\,in\,Consumption\,\Delta C}{Change\,in\,Income\,\Delta Y};0.75=\frac{\Delta C}{1,000}\] \[\therefore \]Change in consumption expenditure = Rs.750 crore.                                      (iv)Calculation of Change in Savings                                                      Marginal Propensity to Save (MPS) \[=1-MPC=1-0.75=0.25~\]Now,                                        \[MPS\,\,\,\,\,=\frac{Change\,in\,Saving\,\Delta S}{Change\,in\,Income\,\Delta Y};0.25=\frac{\Delta S}{1,000}\]            \[\therefore \]Change in savings = Rs.250 crore