For a hypothetical economy, assume the government increased an infrastructural investment by Rs. 30,000 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) = ₹30,000 crore, MPC = 0.80

Step 1: Multiplier
k = 1/(1-MPC) = 1/(1-0.80) = 1/0.20 = 5

Step 2: Increase in income
ΔY = k × ΔI = 5 × ₹30,000 = ₹1,50,000 crore

Step 3: Increase in consumption
ΔC = MPC × ΔY = 0.80 × ₹1,50,000 = ₹1,20,000 crore

Step 4: Increase in saving
ΔS = MPS × ΔY = 0.20 × ₹1,50,000 = ₹30,000 crore
Or: ΔS = ΔY - ΔC = ₹1,50,000 - ₹1,20,000 = ₹30,000 crore

The increase in income is ₹1,50,000 crore, increase in consumption is ₹1,20,000 crore, and increase in saving is ₹30,000 crore.