Suppose for an economy, government proposes two investment projects for construction of expressways with an additional investment of Rs. 2000 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: Additional investment (ΔI) = ₹2,000 crore, MPC = 0.8

Step 1: Multiplier
k = 1/(1-MPC) = 1/(1-0.8) = 1/0.2 = 5

Step 2: Increase in income
ΔY = k × ΔI = 5 × ₹2,000 = ₹10,000 crore

Step 3: Increase in consumption
ΔC = MPC × ΔY = 0.8 × ₹10,000 = ₹8,000 crore

Step 4: Increase in saving
ΔS = MPS × ΔY = 0.2 × ₹10,000 = ₹2,000 crore
Or: ΔS = ΔY - ΔC = ₹10,000 - ₹8,000 = ₹2,000 crore

The increase in income is ₹10,000 crore, increase in consumption is ₹8,000 crore, and increase in saving is ₹2,000 crore.