question_answer

 In an economy, the equilibrium level of income is Rs.12,000 crore. The ratio of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is 3:1. Calculate the additional investment needed to reach a new equilibrium level of income of Rs. 20,000 crore. Identify the economic value involved in increasing the investment in the economy.

Answer:

Given,   \[\frac{MPC}{MPS}=\frac{3}{1}\] Let MPC be 3x and MPS be1x Also,             MPC +MPS =1 \[\therefore \,\,\,\,\,\,\,\,\,\,\,3x+1x=1\,\,\,\,\,\Rightarrow 4x=1\]                \[x=\frac{1}{4}=0.25\] Or         \[MPS=x=0.25\]MPS =x=0.25             \[MPC=3x=3\times 0.25=0.75\] Now, change in income\[(\Delta Y)\]= Rs. 8,000                         \[K=\frac{1}{1-MPC}=\frac{1}{1-0.75}=4\]              \[K=\frac{\Delta Y}{\Delta I}\]               \[\Rightarrow \,\,\Delta Y=\Delta I.K\]             \[8,000=\Delta I\times 4\]                        \[\Rightarrow \,\,\Delta /=Rs.\,\,2,000\] So, investment in the economy should rise by Rs. 2,000.                                              The economic value reflected is concern for increasing the productive capacity of the country.