Question

For a hypothetical economy, assume the government increased an infrastructural investment by Rs. 20,000 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.

Increase in Income: Rs. 1,00,000 crore
Increase in Consumption Expenditure: Rs. 80,000 crore

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 = 1 / (1 - MPC)
Given MPC = 0.8:
Multiplier = 1 / (1 - 0.8) = 5
Total increase in income:
ΔY = Multiplier × Investment = 5 × 20,000 = Rs. 1,00,000 crore
Increase in consumption expenditure:
ΔC = MPC × ΔY = 0.8 × 1,00,000 = Rs. 80,000 crore