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Determination Of Income And Employment

Question

In an economy investment expenditure is increased by र 700 crores and MPC is 0.9. Calculate total increase in income and consumption expenditure.

Solution

straight K space equals space fraction numerator 1 over denominator 1 minus MPC end fraction space equals space fraction numerator 1 over denominator 1 minus 0.9 end fraction space equals space fraction numerator 1 over denominator 0.1 end fraction space equals space fraction numerator 1 over denominator 1 divided by 10 end fraction space equals space 10

Total increase in income = Increase in investment x Multiplier
= 700 x 10 = 7,000 crores.

Total increase in consumption expenditure

equals space 0.9 space of space 7000 space equals space 9 over 10 cross times 7000 equals space 6300 space crores.