In an economy, everytime income rises, 75% of the rise in income is spent on consumption. Now, suppose in the same economy, investment rises by ₹ 750 crore. Calculate the following:

Change in income.

MPS.

Q: In an economy, everytime income rises, 75% of the rise in income is spent on consumption. Now, suppose in the same economy, investment rises by ₹ 750 crore. Calculate the following: 1. Change in income. 2. MPS.

1. Here, MPC $= 0.75$ $\Delta\text{I}=₹ \ 750\text{ crore}$ Now, $\text{K}=\frac{1}{1-\text{MCP}}$ $\therefore\text{K}=\frac{1}{1-0.75}=\frac{1}{0.25}=4$ Again, $\text{K}=\frac{\Delta\text{Y}}{\Delta\text{I}}$ $4=\frac{\Delta\text{Y}}{750}$ $\therefore\Delta\text{Y}=750\times4$ $\Delta\text{Y}=₹ \ 3000\text{ crore}$ 2. MPS = 1 - MPC = 1 - 0.75 = 0.25

Question

In an economy, everytime income rises, 75% of the rise in income is spent on consumption. Now, suppose in the same economy, investment rises by ₹ 750 crore. Calculate the following:

Change in income.
MPS.

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Solution

Here, MPC $= 0.75$

$\Delta\text{I}=₹ \ 750\text{ crore}$

Now, $\text{K}=\frac{1}{1-\text{MCP}}$

$\therefore\text{K}=\frac{1}{1-0.75}=\frac{1}{0.25}=4$

Again, $\text{K}=\frac{\Delta\text{Y}}{\Delta\text{I}}$

$4=\frac{\Delta\text{Y}}{750}$

$\therefore\Delta\text{Y}=750\times4$

$\Delta\text{Y}=₹ \ 3000\text{ crore}$

MPS = 1 - MPC = 1 - 0.75 = 0.25

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