(a) For a hypothetical economy, the government incurs an additional investment expenditure of Rs. 5,000 crore. Assuming that the Marginal Propensity to Save (MPS) becomes half from its present level of 20%, estimate the change in income due to this fall in Marginal Propensity to Save (MPS). (b) State the meaning of autonomous investment.

Question

Accepted Answer

(a) Given: Additional investment (ΔI) = ₹5,000 crore, MPS becomes half from its present level.

If present MPS = 0.2, new MPS = 0.1
New MPC = 1 - New MPS = 1 - 0.1 = 0.9

New Multiplier: k = 1/(1-MPC) = 1/(1-0.9) = 1/0.1 = 10

Increase in income: ΔY = k × ΔI = 10 × ₹5,000 = ₹50,000 crore

(b) If present MPS = 0.4, new MPS = 0.2
New MPC = 1 - 0.2 = 0.8

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

Increase in income: ΔY = k × ΔI = 5 × ₹5,000 = ₹25,000 crore

The increase in income is greater when MPS is lower because a lower MPS means higher MPC, which increases the multiplier value and leads to a larger cumulative increase in income.