Home
Class 12
ECONOMICS
Assuming that increase in investment is ...

Assuming that increase in investment is Rs.900 crore and marginal propensity to consume is 0.6, explain the working of multiplier.

Text Solution

Verified by Experts

Given that `Deltal=900` and MPC `=0.6 ,increae in income is in the following sequence:
Increase in investment raises income of those who supply investment goods by Rs.900. This is first round.
Since MPC `=0.6,` income earners spent Rs. 540 on consumption. This raises income by 540= 900 xx0.6` in the second round.
In the Similar way, third round increase in income is `324=540xx0.6.`
In this way, income goes on increasing round by with each round increase in income equal to 60 percent of the previous round increase.
The total increase in income is:
`DeltaY=Deltal(1)/(1-MPC)=900xx(1)/(1-0.6)`
`=Rs.2,250` crores.
Promotional Banner

Topper's Solved these Questions

  • INCOME DETERMINATION AND MULTIPLIER

    SANDEEP GARG|Exercise TRUE AND FALSE|12 Videos

  • INCOME DETERMINATION AND MULTIPLIER

    SANDEEP GARG|Exercise SHORT TYPE|11 Videos

  • INCOME DETERMINATION AND MULTIPLIER

    SANDEEP GARG|Exercise MCQ|20 Videos

  • GOVERNMENT BUDGET AND THE ECONOMY

    SANDEEP GARG|Exercise Unsolved Practicals|8 Videos

  • MEASUREMENT OF NATIONAL INCOME

    SANDEEP GARG|Exercise Miscellaneous Practicals|16 Videos

Similar Questions

Explore conceptually related problems

Assuming that increases in investment is 1000crore and marginal propensity to consume is 0.9 explain the working of multiplier

If the value of marginal propensity to consume is 0.8. Calculate the value of multiplier.

there is an increasae in investment of Rs. 100 crore in an economy , mnarginal propensity to cosume is 1. what can you say about increase in income ?

If an economy , Saving Function is given by S =(-)50+0.2Y and Y = Rs. 2,000 crores, consumption expenditure for the economy would be Rs. 1,650 crores and the autonomous investment is Rs. 50 crores and the marginal propensity to consume is 0.8 True or False ? Justify your answer with proper calculattions.