In an economy, the marginal propensity to consume (MPC) is 0.6. If investment increases by Rs 400 crore, by how much will the equilibrium income increase?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs 1,000 crore
The investment multiplier is \( k=\frac{1}{1-\text{MPC}} \), and the change in income = \( k \times \) change in investment.
- MPC = 0.6, change in investment = Rs 400 crore
- \( k=\frac{1}{1-0.6}=\frac{1}{0.4}=2.5 \)
- Increase in income \( =2.5\times400=1000 \)
So the equilibrium income rises by Rs 1,000 crore.