The consumption function of the economy is as C = 50 + 0.8 Y. Calculate change in income if the economy makes an additional investment of ₹80 crores.
Answer & explanation
Correct answer: option 4
The correct answer is option (4) : ₹400 crores
Given the consumption function: C=50+0.8YC
The marginal propensity to consume (MPC) is 0.8. T
he investment multiplier (k) is given by the formula: 1/ (1-MPC)
Plugging in the value of MPC:
k=1/ (1-0.8)
k= 1/0.2
k =5
The change in income (ΔY) is calculated by multiplying the multiplier (k) with the additional investment (ΔI):
ΔY=k×ΔI
ΔY= 5*80
= 400 crores