Suppose for an economy, government proposes project for construction of expressways with an incremental investment of Rs. 1200 crore. Assuming, 80% of increase in income is spent on consumption. Estimate the following on the basis of above information : (a) Change in income (ΔY). (b) Change in consumption (ΔC).

Question

Accepted Answer

Given: Incremental investment (ΔI) = ₹1,200 crore, 80% of increase in income is spent on consumption (MPC = 0.8)

Step 1: Calculate the multiplier
k = 1/(1-MPC) = 1/(1-0.8) = 1/0.2 = 5

Step 2: Calculate increase in income
ΔY = k × ΔI = 5 × ₹1,200 = ₹6,000 crore

Step 3: Calculate increase in consumption
ΔC = MPC × ΔY = 0.8 × ₹6,000 = ₹4,800 crore

Step 4: Calculate increase in saving
ΔS = MPS × ΔY = 0.2 × ₹6,000 = ₹1,200 crore
Or: ΔS = ΔY - ΔC = ₹6,000 - ₹4,800 = ₹1,200 crore

The increase in income is ₹6,000 crore, increase in consumption is ₹4,800 crore, and increase in saving is ₹1,200 crore.