If an economy plans to increase its income by ₹ 2,000 crore and the Marginal Propensity to Consume is 75%……………

Question 4:If an economy plans to increase its income by ₹ 2,000 crore and the Marginal Propensity to Consume is 75%. Estimate the increase in investment required to achieve the targeted increase in income.

The correct answer is – To estimate the increase in investment required to achieve the targeted increase in income, we can use the concept of the expenditure multiplier, which shows the relationship between changes in autonomous spending and the resulting change in income.

The expenditure multiplier is calculated as:

Multiplier = 1 / (1 – MPC)

where MPC is the Marginal Propensity to Consume.

In this case, the MPC is 0.75, so the multiplier is:

Multiplier = 1 / (1 – 0.75) = 4

This means that a ₹ 2,000 crore increase in autonomous spending will lead to a ₹ 8,000 crore increase in total output (income).

Since the targeted increase in income is ₹ 2,000 crore, we can use the multiplier to estimate the required increase in autonomous spending (investment) as:

Increase in autonomous spending = Targeted increase in income / Multiplier = ₹ 2,000 crore / 4 = ₹ 500 crore

Therefore, an increase in investment of ₹ 500 crore is required to achieve the targeted increase in income of ₹ 2,000 crore, given an MPC of 0.75