In an economy investment expenditure increased by 400 crore and marginal propensity to consume is 0.8.
What is the total increase in saving?
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: 400 crore
Increase in saving = MPS * Change in income
(MPS= 1- MPC)
Change in income = k (multiplier ) * Change in investment expenditure
K= \(\frac{1}{\text 1 - MPC }\)
OR \(\frac{ 1}{ MPS}\)
k= \(\frac{ 1}{ \text 1 - 0.8}\)
= 5
Change in Income = 5 * 400 = 2000
Increase in saving= 0.2 * 2000 = 400