In an economy 75 percent of the increase in income is spent on consumption.
Investment is increased by Rs.1,000 crores. Calculate: (a) total increase in income , (b) total increase in consumption expenditure.

Answer

Total increase in income =Rs. 4,000 crores; Total increase in Consumption Expenditure = Rs. 3,000 crores

Explanation

Given: MPC `0.75` (as `75%` of increase in income is spent on consumption)
Multiplier (k)`=(1)/(1-MPC)=(1)/(1-0.75)=(1)/(0.25)=4`
When also know: k`=("Change in Income"(DeltaY))/("Charge in Investmemt"(Deltal))`
`4=("Change in Income"(DeltaY))/(1,000)`
So. Change in Income `(DeltaY)=Rs.4,000` crores
MPC `=("Change in Consumption"(DeltaC))/("Charge in Income"(DeltaY))`
`0.75=("Change in Consumption"(DeltaC))/(4,000)`
So, Change in Consumption `(DeltaC) = Rs. 3,000` crores