In an economy , marginal propensity to consume is 0.75. If investment expenditure is increased by Rs. 500 crores, calculate the total increaes in income and consumption expenditure.

Answer

Total increase in income =Rs.2,000 crores; Total increase in Consumption Expenditure = Rs.1,500 crores

Explanation

Multiplier (k) `=(1)/(1-MPC)=(1)/(1-0.75)=(1)/(0.25)=4`
We also : k`=("Change in Income"(DeltaY))/("Change in Investment"(Deltal))`
4`=("Change in Income"(DeltaY))/500`
so, Change in Income `(DeltaY)=Rs.2,000` crores
MPC`=("Change in Consumption"(DeltaC))/("Change in Income"(Deltal))`
0.75`("Change in Consumption"(DeltaC))/(2,000)`
So Change in Consumption `(DeltaC)= Rs. 1,500` crores