Based on the following diagram answer the question :
Given initial investment is ₹ 200 crores and MPC = 0.8. If autonomous investment increased by ₹50 crores, the income will increase by ₹ _______ crores.
Answer & explanation
Correct answer: option 3
The correct answer is option (3) : 250
Given :
Initial investment (I) = ₹200 crores
MPC = 0.8 (Marginal Propensity to Consume)
Increase in autonomous investment = ₹50 crores
The multiplier (k) can be calculated using the formula :
$k =\frac{1}{1-mpc}$
$k=\frac{1}{1-08}=5$
Change in volume = k* change in investment
Change in income = 5* 50
= ₹ 250 crores