If the Marginal propensity to save (MPS) is 0.5 and the initial change in investment is ₹250 crore, then the final change in income is:
Answer & explanation
Correct answer: option 4
The correct answer is Option 4: ₹500 crore
MPC + MPS = 1
MPC = 1 - MPS
MPC = 1 - 0.5
MPC = 0.5
We know that:
k = \(\frac{ 1}{ 1-MPC}\) also, k = \(\frac{\text{ΔY}}{ \text{ΔI}}\)
According to the question;
\(\frac{ 1}{ 1-0.5}\) =\(\frac{\text{ΔY}}{ \text{250}}\)
\(\frac{ 1}{ 0.5}\) =\(\frac{\text{ΔY}}{ \text{250}}\)
\(\frac{10 }{ 5}\) =\(\frac{\text{ΔY}}{ \text{250}}\)
2 = \(\frac{\text{ΔY}}{ \text{250}}\)
ΔY = ₹500 crore