If an additional investment of Rs. 500 crores increases the income by Rs.500 crores. In the first round of the multiplier process, by Rs.450 crores in the second round, by 405 crores in the third round and so on. Determine the total increase in income.

Answer

Total increase in income `=Rs.5,000` crores

Explanation

Increase of Rs. 450 crores in the second round and of Rs. 405 crores in the third round indicates that `90%` of additional income is spent on consumption, i.e.MPC` =0.90.`
Multiplier (k) `=(1)/(1-MPC)=(1)/(1-0.90)=(1)/(0.10)=10`
We also know: k `=("Change in Income"(DeltaY))/("Change in Investment"(Deltal))`
`10= ("Change in Income"(DeltaY))/(500)`
Change in Income`(DeltaY)=Rs.5,000` crores