Question

Suppose in a hypothetical economy, the savings increase by ₹ 20 crores when national income increases by ₹ 100 crores. Compute the additional investments needed to attain an increase in national income by ₹ 6,000 crores?

Answer 1

Answer:

There is a need to increase investment by ₹ 1,200 crores.

Explanation:

In an economy the savings increases by ₹ 20 crores when income increases by ₹ 100 crores.

The marginal propensity to save is the ratio of change in savings due to a change in income.

Marginal propensity to save

= $\frac{\Delta S}{\Delta Y}$

= $\frac{20}{100}$

= 0.2

The investment multiplier measures the change in the income due to a change in the investment.

Investment multiplier

= $\frac{1}{MPS}$

= $\frac{1}{0.2}$

= 5

Increase in investment required to increase income by ₹ 6,000 crores

= $\frac{ 6,000}{5}$

= ₹ 1,200

Answer 2

Answer:

There is a need to increase investment by   ₹ 1,200 crores .

In an economy the savings increases by ₹ 20 crores when income increases by ₹ 100 crores.

The marginal propensity to save is the ratio of change in savings due to a change in income.

Marginal propensity to save

= 0.2

The investment multiplier measures the change in the income due to a change in the investment.

Investment multiplier

= 5

Increase in investment required to increase income by ₹ 6,000 crores

= ₹ 1,200