For a hypothetical economy, assume the government increased an infrastructural investment by Rs. 10,000 crore. 80% of additional income is consumed in the economy. Estimate the increase in income and the corresponding increase in consumption expenditure in the economy.

Question

Accepted Answer

Given: Additional investment (ΔI) = ₹10,000 crore, MPC = 0.80 (80% of additional income is consumed)

Step 1: Calculate the multiplier
k = 1/(1-MPC) = 1/(1-0.80) = 1/0.20 = 5

Step 2: Calculate increase in income
ΔY = k × ΔI = 5 × ₹10,000 = ₹50,000 crore

Step 3: Calculate increase in consumption
ΔC = MPC × ΔY = 0.80 × ₹50,000 = ₹40,000 crore

Step 4: Calculate increase in saving
ΔS = MPS × ΔY = 0.20 × ₹50,000 = ₹10,000 crore
Or: ΔS = ΔY - ΔC = ₹50,000 - ₹40,000 = ₹10,000 crore

The increase in income is ₹50,000 crore, increase in consumption is ₹40,000 crore, and increase in saving is ₹10,000 crore.