Question

In an economy, marginal propensity to consume is 0.75.if investment

expenditure is increased by Rs 500 crores, calculate the increase in income and

consumption expenditure.​

Answer 1

MPC = 0.75
Change in investment = 500
Change in income = ?
Change in consumption = ?

1 step: K = 1 / 1-MPC.
= 1 / 1-0.75
= 1 / 0.25
K = 4

2 step: K = change in income/ change in investment
So , 4= change in income/ 500
Change in income = 500*4 = 2000

3 step: MPC = change in consumption/ change in income
So , 0.75 = change in consumption/2000
Change in consumption = 0.75*2000=1500