It is a planned to increase national income by Rs. 1,000 in an economy. How much increase in investment is required to achieve this goal if MPC = 0.6?

Kapil
Latest Answer: 1 month ago
In: Commerce

It is a planned to increase national income by Rs. 1,000 in an economy. How much increase in investment is required to achieve this goal if MPC = 0.6?

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Answered By Nikita Chetry
Answer: 1 month ago

Given: Target increase in national income (ΔY) = Rs. 1,000 Marginal Propensity to Consume (MPC) = 0.6 Step 1: Calculate the multiplier (k) k=11−MPC=11−0.6=10.4=2.5k = \frac{1}{1 - MPC}...

Given:

Target increase in national income (ΔY) = Rs. 1,000
Marginal Propensity to Consume (MPC) = 0.6

Step 1: Calculate the multiplier (k)

$k = \frac{1}{1 - MPC} = \frac{1}{1 - 0.6} = \frac{1}{0.4} = 2.5$

Step 2: Find the required increase in investment (ΔI)

$\Delta I = \frac{\Delta Y}{k} = \frac{1000}{2.5} = 400$

Conclusion:
To increase national income by Rs. 1,000 with an MPC of 0.6, investment must increase by Rs. 400.

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