Question
In an economy, 75 per cent of the increase in income is spent on consumption, Investment is increased by Rs 1,00 crore. Calculate :
(i) Total increase in income.
(ii) Total increase in consumption expenditure.
(i) Total increase in income.
(ii) Total increase in consumption expenditure.
Answer: Option A
:
A
(i) 75 per cent of the increase in income is spent on consumption.
∴ MPC=ΔCΔY=75100=0.75
Multiplier (M)=11−MPC=11−0.75=10.25=4
We know, M=ΔYΔI
⇒ ΔY=M×ΔI
ΔY=4×1,000=4,000
(ii) Increase in consumption expenditure (ΔC)=MPC.ΔY
=0.75×4,000 (∵MPC=ΔCΔY), so that ΔC=MPC.ΔY)
=75100×4,000=3,000
(i) Total increase in income = Rs 4,000 crore.
(ii) Total increase in consumption expenditure = Rs 3,000 crore.
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:
A
(i) 75 per cent of the increase in income is spent on consumption.
∴ MPC=ΔCΔY=75100=0.75
Multiplier (M)=11−MPC=11−0.75=10.25=4
We know, M=ΔYΔI
⇒ ΔY=M×ΔI
ΔY=4×1,000=4,000
(ii) Increase in consumption expenditure (ΔC)=MPC.ΔY
=0.75×4,000 (∵MPC=ΔCΔY), so that ΔC=MPC.ΔY)
=75100×4,000=3,000
(i) Total increase in income = Rs 4,000 crore.
(ii) Total increase in consumption expenditure = Rs 3,000 crore.
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