Question

The saving function of an economy is given as : S `=-40+0.4(Y).` Calculate the total increase in income if investment expenditure increases by Rs. 700 crores.

Answer 1

We know, Saving function is expressed as: S`=-overlinec+ (1-b)`Y. It means, 0.4 indicates (1-b), i.e. MPS . So,
MPS`=04.` Multiier (k) `=(1)/(MPS)=(1)/(0.4)=2.5.`
We also know: Multiplier (k) `=("Change in Income"(DeltaY))/("Change in Instment"(Deltal))`
Given: Increase in Investment expenditure ` (Deltal) = Rs. 700` crores
`2.5=("Change in Income"(DeltaY))/(700)`
Change in `(DeltaY) = RS. 1,750` crores