question_answer

In an economy the marginal propensity to consume is 0.75 investment expenditure in the economy increases by Rs. 75 crore. Calculate the total increase in national income.

Answer:

Given:

MPC = 0.75

\[\Delta I\]=75

To calculate: \[\Delta Y\]

We know,

Multiplier, k = \[\frac{1}{1-MPC}=\frac{1}{1-0.75}=\frac{1}{0.25}=4\]

Now,     \[k=\frac{\Delta Y}{\Delta I}\]

Substituting the value,

\[4=\frac{\Delta Y}{75}\]

or,       \[\Delta Y\]= Rs. 300 crore

Thus with an increase in the investment expenditure by Rs 75 crores, National Income increased by Rs 300 crore.