In an economy, if initial investments are increased by ₹ 100 crores, discuss the working of investment multiplier presuming marginal propensity to consume is 0.8.
CBSE 58-1-1 PAPER SET 2020
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The working of investment multiplier is based on the principle that one’s expenditure is another’s income. Given initial investment = ₹ 100 crores and MPC = 0.8
$\text{k}=\frac{1}{1-\text{mpc}}$
$=\frac{1}{0.2}=5$
$\triangle\text{Y}=\text{K}\times\triangle\text{I}$
$=5\times100$
$=₹\ 500\ \text{Crores}$
| Round | Change in Investment(₹ in crores) | Change in Income(₹ in crores) | Change in Consumption(₹ in crores) | Change in Saving(₹ in crores) |
| I | 100 | 100 | 80 | 20 |
| II | - | 80 | 64 | 16 |
| III | - | 64 | 51.2 | 12.8 |
| - | - | - | - | |
| 500 | 400 | 100 |
$=\frac{1}{0.2}=5$
$\triangle\text{Y}=\text{K}\times\triangle\text{I}$
$=5\times100$
$=₹\ 500\ \text{Crores}$
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