Assuming that increase in investment is Rs. 1000 crore and marginal propensity to consume is 0.9, explain the working of multiplier.

Solution

Given that
Value of MPC = 0.9
Initial increase in investment = Rs 1000 crore
So, every increase of Re 1 in the income, 0.9 part of the increased income will be consumed
by people.
Consumption= Rs 0.90
Saving= Rs 0.10

It is given that initial increase in investment of RS1000 will lead to change in the income by RS1000 in the first round. As MPC is 0.9 so people will consume 0.9 of the increased income i.e 900 thereby saving RS 100. In the next round due to increase in the consumption expenditure by RS 900 there will be an increase in income by RS 900. Then people will again spend the increased income i.e RS 810 and save the rest part of the income RS 90. similarly, this process will continue and the income will go on increasing as a result of the increase in consumption. The total change in the income is RS 10,000 and the change in the investment will be RS 1,000.

Some More Questions From Determination of Income and Employment Chapter

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Determination Of Income And Employment

Assuming that increase in investment is Rs. 1000 crore and marginal propensity to consume is 0.9, explain the working of multiplier.

Some More Questions From Determination of Income and Employment Chapter

Calculate consumption level for Y = र 1000 crores if consumption function is C = 300 + 0.5Y.

State relationship between income and consumption.

What is Breakeven point?

What are the types of Propensity to consume?

How does MPC affect level of income?

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