Question

In an economy, the equilibrium level of income falls short by Rs. 500 crores. Calculate the additional investment needed to achieve the equilibrium level of income , if `80%` of increased income is spent on consumption.

Answer 1

Correct Answer - Additional Investment required = 100 crores
Given: MPC `=0.80` (as `80%` of additional income is spent on consumption)
Multiplier (k) `=(1)/(1-MPC)=(1)/(1-0.80)=(1)/(0.20)=5`
We also know : K `=("Change in come"(DeltaY))/("Change in Investment"(Deltal))`
Given : Increase in Income `(DeltaY)` required `=Rs. 500` crores
i.e., 5 `=(500)/("Change in Investment"(Deltal))`
Hence , Change in Investment `(Deltal) = Rs. 100` crores