In an economy every time income rises, 75% of increase in income is spent on consumption. Now suppose in the same economy, investment rises by र 750 crores. Calculate the following:
(i) Change in income (ii) Change in saving.

Solution

Spending 75% of increase in income on consumption means MPC = 75%
(i)

Multiplier space left parenthesis straight K right parenthesis space equals space fraction numerator 1 over denominator 1 minus MPC end fraction space equals space fraction numerator 1 over denominator 1 minus begin display style 75 over 100 end style end fraction space equals space fraction numerator 1 over denominator begin display style 25 over 100 end style end fraction space equals space 4 space space space space space space space space space space space space space space space space straight K space equals space fraction numerator increment straight Y over denominator increment straight I end fraction space space or space 4 space equals space fraction numerator increment straight Y over denominator 750 end fraction

ΔY = 4 x 750 = 3000 crores
(change in income is र 3000 crores)

(ii) MPS = 1 – MPC = 1 – 75% = 25%
Change in Saving = 25% of change in income
= 25% of 3000 = र 750 crores

Some More Questions From Determination of Income and Employment Chapter

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