Question

For a hypothetical economy, assume the government increased an infrastructural investment by ₹ 30,000 crore. 80% of additional income is consumed in the economy. Estimate the increase in income and the corresponding increase in consumption expenditure in the economy.

Hint:

The income multiplier effect amplifies an initial investment in the economy. The total income change is determined using \( \Delta Y = K \times \Delta I \), and consumption change is calculated as \( \Delta C = MPC \times \Delta Y \).

Answer 1

Given: Increase in Investment ( \( \Delta I \) ) = ₹ 30,000 crore
Marginal Propensity to Consume (MPC) = 80% = 0.8

Step 1: Calculate the Multiplier ( \( K \) )

The multiplier is given by the formula:

\[ K = \frac{1}{1 - MPC} \]

Substituting the values:

\[ K = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5 \]

Step 2: Calculate the Increase in Income ( \( \Delta Y \) )

The increase in income is given by:

\[ \Delta Y = K \times \Delta I \]

Substituting the values:

\[ \Delta Y = 5 \times 30,000 = ₹ 1,50,000 \text{ crore} \]

Step 3: Calculate the Increase in Consumption Expenditure ( \( \Delta C \) )

The increase in consumption expenditure is calculated as:

\[ MPC = \frac{\Delta C}{\Delta Y} \]

Rearranging:

\[ \Delta C = MPC \times \Delta Y \]

Substituting the values:

\[ \Delta C = 0.8 \times 1,50,000 = ₹ 1,20,000 \text{ crore} \]

Final Answer:

Increase in Income ( \( \Delta Y \) ) = ₹ 1,50,000 crore

Increase in Consumption Expenditure ( \( \Delta C \) ) = ₹ 1,20,000 crore