Estimate the value of incremental investment if, equilibrium level of income increases by Rs. 50,000 crore and half of additional income is always saved in the economy.

Question

Accepted Answer

Given: Equilibrium income increases by ₹50,000 crore (ΔY = ₹50,000 crore), half of additional income is saved (MPS = 0.5)

Step 1: Calculate MPC
MPC = 1 - MPS = 1 - 0.5 = 0.5

Step 2: Calculate the multiplier
k = 1/(1-MPC) = 1/(1-0.5) = 1/0.5 = 2

Step 3: Calculate incremental investment
ΔY = k × ΔI
50000 = 2 × ΔI
ΔI = 50000 / 2
ΔI = ₹25,000 crore

The incremental investment is ₹25,000 crore. This means that an additional investment of ₹25,000 crore, through the multiplier process, leads to a total increase in equilibrium income of ₹50,000 crore.