In an economy, every time the National Income rises 20% of the rise in income is saved by households. Now suppose there is a rise in investment by Rs.100 crores, then the National Income in this economy will rise by what amount?
Answer & explanation
Correct answer: option 2
THE CORRECT ANSWER IS OPTION 2: Rs.500 crores
We know that:
k = \(\frac{ 1}{ 1-MPC}\) also, k = \(\frac{\text{ΔY}}{ \text{ΔI}}\)
OR
k = \(\frac{ 1}{ MPS}\) also, k = \(\frac{\text{ΔY}}{ \text{ΔI}}\)
As, MPC + MPS = 1
According to the question;
\(\frac{ 1}{ 0.2}\) =\(\frac{\text{ΔY}}{ \text{100}}\)
\(\frac{ 10}{ 2}\) =\(\frac{\text{ΔY}}{ \text{100}}\)
5 =\(\frac{\text{ΔY}}{ \text{100}}\)
ΔY = 500 crores