In an economy , with every increase in income, 10 per cent of the rise in income is saved. Suppose a fresh investment of Rs.120 crores takes place in the economy, Calculate the following : (i) Change in the income, (ii) Change in consumption.

Answer

(i) Change in the income = Rs. 1,200 crores; (ii) Change in consumption = Rs. 1,080 crores.

Explanation

Given: MPS `=0.10 (as 10 per rise in income is saved)
Multiplier (k) `=(1)/(MPS)=(1)/(0.10)=10`
We also know: k =("Change in Income"(DeltaY))/("Change in Investment"(Deltal))`
`10=("Change in Income"(DeltaY))/(120)`
So, Change in Income`(DeltaY)=Rs.1,200` crores
MPC `=("Change in Consumption"(DeltaC))/("Change in Income"(DeltaY))`
`0.90=("Change in Consumption"(DeltaC))/(1,200)` `[:'MPC=1-MPS ]`
So, Change in Consumption `(DeltaC) =2,00xx0.90=Rs.1,080`crores