Question

For a hypothetical economy, assume the government increased infrastructural investment by ₹10,000 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:

To calculate income changes, use the multiplier formula. Consumption changes are derived using \(MPC \times \Delta Y\).

Answer 1

The formula for the multiplier is: \[ {Multiplier} = \frac{1}{1 - MPC} \] Given \(MPC = 0.8\): \[ {Multiplier} = \frac{1}{1 - 0.8} = 5 \] Total increase in income: \[ \Delta Y = {Multiplier} \times {Investment} = 5 \times 10,000 = ₹50,000 { crore}. \] Increase in consumption expenditure: \[ \Delta C = MPC \times \Delta Y = 0.8 \times 50,000 = ₹40,000 { crore}. \]