An increase of Rs. 250 crores in investment in an economy resulted in total increase in income of Rs. 1,000 crores. Calcualte the following: (a) Marginal propensity to consume (MPC), (b) Change in Saving ,( c) Change in consumption expenditure , (d) value of multiplier.

Answer

(a) Marginal propensity to consume =0.75; (b) Change in Saving = Rs. Crores; (c ) Change in consumption expenditure = Rs. 750 crores; (d) Value of multiplier =4

Explanation

Multiplier (k) `=("Change in Income"(DeltaY))/("Charge in Investmemt"(Deltal))=(1,000)/(250)=4`
We know, Multiplier (k) `=(1)/(1-MPC)`
`4=(1)/(1-MPC)`
`1-MPC=(1)/(4)`
Hence , MPC `=1-0.25=0.75`
MPC `=("Change in Consumption"(DeltaC))/("Change in Income"(DeltaY))`
`0.75= ("Change in Consumption"(DeltaC))/(1,000)`
So, Change in Consumption Expenditure `(DeltaC)= Rs. 750` crores.
Change in Saving = Change in Income- Change in Consumption Expenditure
So. Change in Saving `=Rs. 1,000` crores` - Rs. 750 crores = Rs. 250` crores