PRACTICALS ON INVESTMENT MULTIPLIER

1) Calculate the value of multiplier, if MPC is (i) 0.60 ; (ii) 0.50

Solution :

(i ) MPC  0.60 (i ) MPC  0.50

1 1
k  k 
1 - M PC 1 - M PC
1 1
k  k 
1 - 0.60 1 - 0.50
1 1
k  k 
0.4 0.5
k  2. 5 k 2
2) Calculate the value of multiplier, if the marginal propensity to
save is 0.25.

Solution :
MPS  0.25
1
k 
M PS
1
k 
0.25
k 4
3) How much additional income will be generated in an
economy with an additional investment of Rs. 100 Crores and
when half of increase in income is spent on consumption
Solution :
Given, MPS  MPC  0.5 (Half of income is saved);
I  Rs.100
1 1
k 
M PS 0.5
k 2
Also , we know that ,
Y
k
I
Y
2
100
 Y  Rs. 200 Crores
4) What is the value of MPC, if an additional investment of Rs.
40 Crores leads to an increase of Rs. 100 Crores in the income?
Solution :
Given, Y  Rs.100 Crores ; I  Rs.40 Crores
Y
k
I
100
k 
40
 k  2.5
Also , we know that ,
1
k
1 - M PC
1
 2.5 
1 - M PC
1
 1  MPC 
2.5
 1  MPC  0.4
 MPC  1  0.4  0.6
5) Calculate the value of multiplier if the entire increase in
income is saved
Solution :
Given, MPC  1 (Entire income is saved)
1
k
M PS
1
k 
1
 k 1
6) In an economy, the increase in income is five times the
increase in investment expenditure. Calculate the value of MPC.
Solution :
Given, k  5
1
k
1 - M PC
1
5
1 - M PC
1
 1  MPC 
5
 1  MPC  0.2
 MPC  1  0.2  0.8
7) In an economy, investment increases by Rs. 200 Crores. As result,
the total income increases by Rs. 1,000 Crores. Calculate the MPC.
Solution :
Given, Y  Rs.1,000 Crores ; I  Rs.200 Crores
Y
k
I
1,000
k 
200
 k 5
Also , we know that ,
1
k
1 - M PC
1
5
1 - M PC
1
 1  MPC 
5
 1  MPC  0.2
 MPC  1  0.2  0.8
8) An increase in investment by Rs. 5,000 Crores leads to increase in
national income which is four times more than increase in
investment. Calculate marginal propensity to save.
Solution :
Given, I  Rs. 5,000 Crores ;
Y  4I  T  5I
Y
k
I
5I
k 
I
 k 5
Also , we know that ,
1
k
M PS
1
5
M PS
1
 MPS 
5
 MPS  0.2
9) Due to an increase in investment, the national income increased by
Rs. 10,000 Crores. If 20% of additional income is saved, calculate the
increase in investment.
Solution :
Given, Y  Rs.10,000 Crores ;
MPS  0.2 ( 20% of additional income is saved)
1
k
M PS
1
k 
0.2
k 5
Also , we know that ,
Y
k
I
10,000
5
I
10,000
 I 
5
 I  Rs. 2,000 Crores
10) Calculate MPC and Multiplier (k) from the following data :
Income 100 200 300
Consumption 80 160 250

Solution :
Income (Y) 100 200 300
Consumption(C) 80 160 250
Increase in - 100 100
Income (ΔY)
Increase in - 80 90
Consumption (ΔC)
MPC (ΔC/ΔY) - 0.8 0.9
Multiplier(k) - 5 10

1
k
1 - M PC
C
MPC 
Y
11) The consumption function of an economy is given as : C = 40+0.8Y.
Calculate the total increase in income and consumption if investment
expenditure increased by Rs. 500 Crores.
Solution :
Given, I  Rs. 500 Crores ;
C  40  0.8 Y (Consumption Function)
 MPC 0.8
1
k
1 - M PC
1
k 
1 - 0.8
1
k 
0.2
k 5
Also , we know that ,
Y
k
I Increase in consumption (C )  MPC(Y)
Y  C  0.8(2,500)
5
500
 Y  Rs. 2,500 Crores
 C  Rs. 2,000 Crores
12) In an economy, the investment expenditure is increased by Rs. 2,000
Crores. Calculate the total increase in income and consumption
expenditure if ratio of MPC to MPS is 4 : 1 .
Solution :
Given, Ratio of M PC to M PS  4 : 1 ; I  Rs. 2,000 Crores
4 1
MPC   0.8 ; MPS   0.2
5 5
1 1
k 
M PS 0.2
k 5
Also , we know that
Y
k
I
Y
5
2,000
 Y  Rs.10,000 Crores
Increase in consumption (C )  MPC(Y)
 C  0.8(10,000)
 C  Rs. 8,000 Crores
13) In an economy, people always consume half of any additional
income and save other half. Determine the additional income generated
if government makes an additional expenditure of Rs. 20,000 .
Solution :

Given, I  Rs. 20,000 Crores

MPC  MPS  0.5 (as half of additional income is saved)
1 1
k 
M PS 0.5
k 2
Also , we know that
Y
k
I
Y
2
20,000
 Y  Rs. 40,000 Crores
 PRACTICALS ON DETERMINATION OF EQUILIBRIUM LEVEL

18.Calculate AD, AS for every level of income and the equilibrium level, from the
following schedule: (assuming that the investment is fixed at ₹40 Crores).

Income 100 200 300 400 500 600

Consumption 120 200 280 360 440 520
Sol.

Income Consumptio Investment Savings AD AS

n (C+I) (C+S)
100 120 40 -20 160 100
200 200 40 0 240 200
300 280 40 20 320 300
400 360 40 40 400 400
500 440 40 60 480 500
600 520 40 80 560 600
Equilibrium Level of income is ₹400 Crores
19.Calculate aggregate demand (AD),aggregate supply (AS) for all level and the
equilibrium level of income from the given schedule, if the investment is fixed at ₹20
Crores:
Income 0 10 20 30 40 50 60 70 80 90 100
Consumpti 20 25 30 35 40 45 50 55 60 65 70
on

Sol.
Next Slide
Income Consumpt Invest. Saving AD AS
ion (C+I) (C+S)
0 20 20 -20 40 0
10 25 20 -15 45 10
20 30 20 -10 50 20
30 35 20 -5 55 30
40 40 20 0 60 40
50 45 20 5 65 50
60 50 20 10 70 60
70 55 20 15 75 70
80 60 20 20 80 80
90 65 20 25 85 90
100 70 20 30 90 100
Equilibrium Level Of income is ₹80 Crores
20.In a two-sector economy, the income and consumption functions is: Y = C +I and C = 50 +
0.80Y, If the investments are ₹50 Crores, calculate: (a) Equilibrium level of income: (b) Level
of consumption at equilibrium; (c) Saving at equilibrium.
21. The function of saving (S) is given to be: S = - 40 +0.25Y. If planned investments are
₹100 crores, determine: (a) Equilibrium level of income; (b) Level of consumption at
equilibrium: (c) Saving at equilibrium.
22.The saving function of an economy is given as: S=-50 +0.4Y. The economy is in
equilibrium at the income level of ₹1,500 crores. Calculate: (a) Investment at equilibrium
income level; (b) Autonomous consumption; (c) Multiplier.
23. The consumption function is expressed as: C=100 + 0.25Y (where C =consumption
expenditure and Y National Income). Calculate saving if consumption expenditure at
equilibrium level of national income is ₹500 crores.
24. The consumption function of an economy is given as: C = 200 + 0.75Y, If planned
investments are ₹500 crores, calculate equilibrium level of national income.
25. In an economy, the consumption function is C= 600 + 0.9Y, where C is consumption
expenditure and Y is income. Calculate the equilibrium level of income and
consumption expenditure, when investment expenditure is 500.
26. In an economy S = -50 + 0.5Y is the saving function (where S = saving and Y=
national income) and investment expenditure is ₹7,000. Calculate: (i)Equilibrium level
of national income. (i) Consumption expenditure at equilibrium level of national
income.
27.In an economy, C = 300 + 0.8Y and I=500 (where C = Consumption, Y = Income, I =
Investment). Calculate the following: (a) Equilibrium level of income; (b) Consumption
expenditure at equilibrium level of income.
28. The Consumption Function is given as C=75+0.75Y and autonomous
investment is Rs.100 crore. Derive the saving function and calculate the
level of income at which savings is equal to investment.

GIVEN:
Consumption function =75 + 0.75Y
Where, autonomous consumption = 75
And MPC= 0.75
Investment = 100
TO FIND:
(i) Savings function
(ii) Level of income when I=S
SOL,
(i) savings function (S) = - autonomous consumption + MPS(Y)
S= -75 + ( 1- MPC)Y
S= - 75 +(1-0.75)Y
S= -75+(0.25)Y
(ii) Level of income when I = S ,
Therefore , S= -75+(0.25) Y
I = -75+(0.25)Y {I=S}
100 = -75 +(0.25)Y
100 + 75 / (0.25) = Y
Y= RS. 700 CR.

29. From the following information about an economy , calculate (i) its
equilibrium level of national income , and (ii) saving at equilibrium level of
National income . Consumption function : C= 200 + 0.9Y ( where C=
Consumption expenditure expenditure and Y = national income )
Investment expenditure : I = 3,000.

Given :
C = 200 + 0.9Y
Autonomous consumption = 200
MPC= 0.9
MPS = 1- MPC = 1-0.9=0.1
Investment = 3,000
To Find:
(i) Equilibrium level of national income
(ii) Savings at equilibrium level of national income

SOL:
(i)Equilibrium level of national income Y=AD=C+I
Y= 200+0.9Y + 3,000
Y=3200 +0.9Y
Y-0.9Y=3200
Y(1-0.9) = 3200
Y(0.1) = 3200
Y=3200/0.1
Y=32,000
(ii) Savings at equilibrium level of income Y=AS=C+S
Y=200+(0.9)32000+S
32000= 29000 +S
S= RS.3000/- CR.
 MISCELLANEOUS QUESTIONS
30. In an economy , the marginal propensity to save is 0.25 . Investment is
increased by Rs. 200 crores . Calculate the total increase in income and
consumption expenditure.

Given :
MPS = 0.25
MPC = 1-0.25 = 0.75
Change in Investment = 200
TO FIND:
(i) Change in income
(ii) Change in consumption
SOL:
Multiplier(k)= 1/MPS =1/0.25 = 4
Also, Multiplier(k)=change in income / change in investment
4= change in income / 200
Rs. 800 = change in income
(ii)MPC = change in income / change in income
0.75 = change in income / 800
Change in income = Rs. 600

31. By increase in investment of RS. 100 crores , National income of a

country increased by Rs. 250 crores . Find out the marginal propensity to
consume

GIVEN:
(i) Increase in investment of RS.100 crores
(ii) increase in national income RS. 250 crores

TO FIND :
Marginal propensity to income
SOL:
Multiplier(k)= change in income / change in investment
K= 250/100
K=2.5
Also, multiplier (k) = 1/1-MPC
2.5 = 1/ 1- MPC
1-MPC= 1/2.5
-MPC = 0.4 -1
0.6 = MPC
32. If increase in investment is Rs. 125 crores and increase in national income by
Rs. 500 crores. Calculate marginal propensity to save

Given :
Change in investment = 125
Change in national income = 500
To find :
Marginal propensity of save
SOL:
Multiplier (k) = change in income / change in investment
K= 500/125
k=4
Also , multiplier (k) = 1/MPS
4= 1/MPS
MPS= ¼
MPS= 0.25
33. An increase in investment in a country leads to increase in national
income by RS.200 crores. If marginal propensity consume is 0.75 , what is
the increase in investment ? Calculate

Given:
Change in national income = 200
Marginal propensity to consume = 0.75
To find:
Change in investment
Sol :
Multiplier (k) = 1/1-MPC
Multiplier (k) = 1/ 1-0.75
K= 1/0.25
K=4
Also, multiplier(k)= change in income / change in investment
Multiplier (k) = 200 /change in investment
4= 200 / change in investment
Change in investment = 200/4
Change in investment =RS.50 crores
34. In an economy , marginal propensity to save is 0.10. How much increase
in investment is required so that national income rises by RS.400 crores.

Given:
Marginal propensity to save = 0.10
Change in national income = 400
To find:
Change in investment
Sol:
Multiplier(k) = 1/MPS
K= 1/0.10
K=10
Also, multiplier(k)=change in income / change in investment
10=400/change in investment
Change in investment = 400/10
Change in investment = RS.40 crores
35. In an economy investment increases by Rs.600 crores . If marginal
propensity to consume is 0.7 , what is the increase in total national income ?

Given:
Change in investment = 600 crores
Marginal propensity consume = 0.7
To find:
Change in national income
Sol:
Multiplier(k)=1/1-MPC
Multiplier(k)=1/1-0.7
Multiplier(k)=1/0.3
Multiplier(k)=3.33333…..
Also, multiplier(k)= change in national income / change in investment
3.33333…= change in national income / 600
1998.888= change in national income
Change in national income = RS.2000 crores (aprox)
36.Given marginal propensity to save 0.25, what will be the increase in
national income if the increase in investment by Rs.125 crores . Calculate.

Given:
marginal propensity to save = 0.25
Change in investment =125
To find :
Change in national income
Sol:
Multiplier(k)=1/MPS
Multiplier(K)=1/0.25
Multiplier (K)= 4
Also, multiplier(K)=change in income / change in investment
4=change in income / 125
Change in income = RS. 500 crores

37.As a result of increase in investmnet by RS.60 crores . National income

rises by RS. 240 crores . Calculate marginal propensity to consume
Given:
Change in investment =60
Change in national income = 240

To find:
Marginal propensity to consume

Sol:
Multiplier(k)=change in income / change in investment
Multiplier (k)= 240 /60
Multiplier(K)=4
Also , multiplier(K) = 1/MPS
4= 1/MPS
MPS=1/4
MPS=0.25
MPC=1-MPS
MPC=1-0.25
MPC=0.75
38. It is planned to make new investment of RS.1000 crores in the economy
How much will be the increase in National income if marginal propensity to
save is 0.4? Calculate .

Given :
Change in investment = 1000
Marginal propensity to save = 0.4
To find :
Change in national income
Sol:
multiplier (K)= 1/MPS
Multiplier (K)= 1/0.4
Multiplier(K)=2.5
Also, multiplier(K)=change in income / change in investment
2.5=change in income / 1000
2500 = change In income
39. An increase in investment by RS. 400 crores leads to increase in national
income by RS.1600 crores. Calculate marginal propensity to consume.

Given:
Change in investment =400
Change in national income=1600
To find :
Marginal propensity to consume
Sol:
Multiplier(K)=change in income / change in investment
Multiplier(K)=1600/400
Multiplier(K)=4
Also, multiplier(K)= 1/1-MPC
4=1/1-MPC
1-MPC=1/4
1-MPC=0.25
-MPC=0.25-1
-MPC=-0.75
MPC=0.75
40. In an economy the marginal propensity to consume is 0.75 . Investment
expenditure in the economy increased by RS.75 crore. Calculate the total
increase in national income .

Given:
Marginal propensity to consume = 0.75
Change in investment = 75
To find:
Change in national income
Sol:
Multiplier(K)= 1/1-MPC
Multiplier(K)=1/1-0.75
Multiplier(K)=1/0.25
Multiplier(K)=4
Also, multiplier(K)= change in income / change in investment
4=change in income / 75
Change in income= RS.300 crore
41. An economy is in equilibrium . Its consumption function is C=300+0.8Y
where C is consumption expenditure and Y is income and investment is
RS.700 . Find national income.

Given:
C= 300+0.8Y
Autonomous conumption = 300
MPC= 0.8
Investment = 700
To find:
National income (Y)
Sol:
Since economy is in equilibrium Y=AD=C+I
Y= 300 + 0.8Y + 700
Y-0.8Y=1000
Y(1-0.8)=1000
Y=1000/0.2
Y=5000
42. An economy is in equilibrium . Its national RS. 5000 and autonomous
expenditure is RS.500 . What is the total consumption expenditure if
marginal propensity to consume is 0.7 ?

Given:
Marginal propensity to consume = 0.7
National income= 5000
Autonomous consumption = 500

To find:
Consumption expenditure

Sol:
Consumption expenditure(C) = autonomous consumption + MPC(Y)
Consumption expendiutre (C) = 500 + 0.7(5000)
Consumption expenditure (C) = 500 = 3500
Consumption expenditure (C) = RS.4000
43. Find ‘ investment’ from the following : National income = RS.500 ;
autonomous consumption = RS.100; marginal propensity to consume 0.75

Given:
National income= 500
Autonomous consumption = 100
Marginal propensity to consume = 0.75

To find:
Investment
Sol:
Consumption expenditue (C) = autonomous consumption + MPC(Y)
C=100+0.75(500)
C=100+375
C=475
Therefore, Y=AD=C+I
500=475+I
Investment(I)=RS.25
44. Find consumption expenditure from the following : Autonomous
consumption = RS.100; Marginal propensity to consume = 0.70;National
income= RS.1000

Given:
Autonomous consumption = 100
Marginal propensity to consume= 0.70
National income = 1000

To find:
Consumption expenditure

Sol:
Consumption expenditure (C) = autonomous consumption + MPC(Y)
C= 100 + 0.70( 1000)
C= 100 +700
Consumption expenditure (C) = RS.800
45. C= 100 + 0.4Y is the Consumption Function of an economy, where C is Consumption
Expenditure and Y Is National Income Investment expenditure is 1,100. Calculate:(i)
Equilibrium level of National Income (ii) Consumption expenditure at equilibrium level
of national income.
46. C = 50 + 0.5Y is the consumption function where C is consumption expenditure and Y
is National Income and investment expenditure is 2,000 in an economy. (i)Calculate
Equilibrium level of (national) income. (ii) Consumption expenditure at equilibrium level
of (National) income
47. From the data given below about an economy, calculate:
(a) investment expenditure, and (b) consumption expenditure.

(i) Equilibrium level of income 5000

(ii) Autonomous consumption 500
(iii) Marginal propensity to consume 0.4
 48. In an economy C= 200 + 0.75Y is the consumption function where C is
consumption expenditure and Y is national income. Investment expenditure is
4,000.Calculate equilibrium level of income and consumption expenditure.

Sol.

C= 200 + 0.75Y

I=4000

Y=C+I
Y=200 + 0.75Y+4000
0.25Y=4200
Y= ₹16800

C= 200 + 0.75Y
C= 200 + 0.75(16800)
C=200+12600
C= ₹12800
49) From the following data about an economy, calculate:
(a) Equilibrium level of national income
(b) Total consumption expenditure at equilibrium level
of national income.
Consumption Function C = 200+0.5Y

Investment Expenditure ₹1,500

MPC + MPS = 1
MPS = 1- MPC
MPS = 1-0.5
MPS = 0.5
50) Calculate investment from the following:

Equilibrium income ₹500

Consumption expenditure at ₹50
zero income
MPC 0.7

Savings = Investment = ₹100

51) Calculate Marginal Propensity to Consume from
the following:

Equilibrium income ₹350

Consumption expenditure at ₹20
zero income
Investment ₹50

Savings = Investment = ₹50

52 )Calculate equilibrium level of income from the
following

Consumption expenditure at ₹40

zero income
MPC ₹0.8
Investment ₹80

Savings = Investment = ₹80

53)Calculate equilibrium national income from the following

Consumption expenditure at Rs. 60

zero income
MPC 0.9

Investment Rs. 100

S  C  (1  b)Y
 100  60  (1  0.9)Y
 100  60  0.1Y
Savings = Investment = Rs. 100
 0.1Y  160
 Y  Rs. 1,600
54)Calculate Marginal propensity to consume from the following

Consumption expenditure at Rs. 70

zero income
Equilibrium Income Rs. 700

Investment Rs. 140

S  C  (1  b )Y
 140  70  (1  b )700
 140  70  700  700b
 140  630  700b
Savings = Investment = Rs. 140
 700b  490
490
b
700
 b  0.7  MPC
55)Calculate investment expenditure from the following data
about an economy which is in equilibrium.
National Income Rs. 1,000
Marginal propensity to save 0.25

Autonomous consumption Rs. 200

expenditure

S  C  (1  b)Y
 S  200  (0.25)1,000
Savings = Investment = Rs. 50
 S  200  250
 S  Rs . 50
National Income ₹1200

MPS 0.20

Investment Expenditure ₹100

National Income ₹1500
Autonomous Expenditure ₹300
Investment Expenditure ₹300
National Income ₹2000

Autonomous Consumption ₹200

Investment Expenditure ₹100

MPC 0.5

Autonomous Consumption ₹300

Investment Expenditure ₹6000

 60.IN an economy the autonomous investment is (I)=100
consumption is C=80+0.4(Y).Is the economy in
equilibrium at an income level(Y)=400 ? Justify.

Given:
C=80+0.4(Y)
Y=C+I
Y=80+0.4(Y)+100
0.6Y=180
Y=180÷0.6
Y=₹300
• No, as AD>AS i.e. given income of 400 is greater than the
equilibrium of income (300).
Autonomous Consumption ₹100

MPS 0.2

Investment Expenditure ₹200

National Income ₹2000

Autonomous Consumption ₹400

Investment Expenditure ₹200

National
National
Income
Income ₹ 800
MPS 0.3
MPS 0.3
Autonomous Expenditure 100
Autonomous Expenditure ₹100
National Income ₹1000

Autonomous Consumption ₹100

Investment Expenditure ₹120

National Income ₹1250

MPS 0.2

Investment Expenditure ₹150

70.In an economy, 20 percent of increased income is saved. How
much will be the increase in income if investment increases by
10,000 ? Calculate.

• Solution:
• MPS = 20/100 = 0.2
• K = 1/MPS
• = 1/0.2
• K = ∆Y/∆I
• 1/0.2 = ∆Y/10000
• ∆Y = 10000/0.2
• = 50,000
71. Suppose marginal propensity to consume is 0.8. How much
increase in investment is required to increase national income by
Rs2,000 crore ? Calculate.

• Solution :
• MPC = 0.8, MPS = 0.2, ∆Y = 2000
• K = 1/MPS
• ∆Y/∆I = 1/0.2
• 2000/∆C = 5
• ∆I = 2000/5
• ∆I = Rs.400cr
72. An economy is in equilibrium. Calculate Marginal propensity
to consume :
National Income = 1,000
Autonomous Consumption Expenditure = 200
Investment Expenditure = 100
Solution :
I = - 𝐶 ̅ + (1 – b)Y (S=I at equilibrium)
100 = -200 + (1 – b)1000
300/1000 = 1 – MPC
MPC = 1 – 0.3
MPC = 0.7
 73. An economy is in equilibrium. Find autonomous consumption
expenditure :
National Income = 1,600
Investment Expenditure = 300
Marginal Propensity to Consume = 0.8
• Solution:
• I = -𝐶 ̅ + (1-b)Y
• 300 = -𝐶 ̅ + (1-0.8)1600
• 𝐶 ̅ = 0.2(1600) – 300
• 𝐶 ̅ = 320 -300
• 𝐶 ̅ = 20
74. From the following data calculate the equilibrium level of
national income:
Autonomous Consumption = 500
Marginal propensity to save = 0.2
Investment = 2,000
• Solution :
• I = -𝐶 ̅+(1-b)Y (S=I at equilibrium)
• 2000 = -500 + 0.2Y
• 0.2Y = 2500
• Y = 2500/0.2
• Y = 12500
75. Calculate consumption expenditure in the economy whose
equilibrium level of income is 20,000, autonomous consumption is
500 and marginal propensity to save is 0.5

• Solution:
• C = 𝐶 ̅ + bY
• C = 500 + 0.5(20,000)
• C = 500 + 10,000
• C = 10,500
76. An economy is in equilibrium. From the following data about an
economy, calculate autonomous consumption.
Income = 5,000
Marginal propensity to save = 0.2
Investment expenditure = 800
• Solution :
• I = -𝐶 ̅ + (1-b)Y (S=I at equilibrium)
• 800 = -𝐶 ̅ + 0.2(5000)
• 𝐶 ̅ = 1000 – 800
• 𝐶 ̅ = 200
77. An economy is in equilibrium. From the following data, calculate
the marginal propensity to save:
Income = 10,000
Autonomous consumption = 500
Consumption expenditure = 8,000
Solution :
• C = 𝐶 ̅ + bY
• 8,000 = 500 + MPC(10,000)
• 7,500/10,000 = MPC
• MPC = 0.75
• MPS = 1 – MPC
• = 1- 0.75
• = 0.25
78. An economy is in equilibrium. From the following data, calculate
investment expenditure:
Marginal propensity to consume = 0.9
Autonomous consumption = 200
Level of income = 10,000
• Solution :
• S = - 𝐶 ̅ + (1-b)Y
• S = -200 + (1-0.9)10,000
• S = -200 + 1,000
• S = 800

• At equilibrium S = I , Therefore I = 800

79. In an economy, investment increased by 1,100 and as a result of
it, income increased by 5,500. Had the marginal propensity to save
been 25 percent, what would have been the increase in income?

• Solution :
• MPS = 0.25, ∆I = 1,100, ∆Y = 5,500
• K = 1/MPS
• K = 1/0.25
• ∆Y/∆C = 4
• ∆Y/1100 = 4
• ∆Y = 4,400
80. If marginal propensity to consume is 0.8, how much will be the
value of investment multiplier ? Calculate.

• Solution :
• MPC = 0.8
• K = 1/1-MPC
• K = 1/1-0.8
• K = 1/0.2
• K=5
81. If in an economy:
(a) Consumption function by C = 100 + 0.75Y,and
(b) Autonomous Investment is rs.150 cr. Estimate
(1) Equilibrium level of income and
(2) Consumption and Savings at the Equilibrium Level of Income

• Solution :
• (1) Y = C + I (At equilibrium)
• Y = 𝐶 ̅ + bY + 150
• Y = 100 + 0.75Y + 150
• 0.25Y = 250
• Y = 250/0.25
• Y = Rs1000 cr

• (2) C = Y – I
• C = 1000 – 150
• C = Rs850 cr
• S = I at equilibrium , therefore S = Rs.150 cr
 82.If in an economy, C = 500 + 0.9Y and I = rs 1,000 cr, where C =
Consumption Expenditure, Y = National Income, I = Investment.
Calculate the
(1) Equilibrium Level of Income;
(2) Value of Investment Multiplier
• Solution :
• (1) Y = C + I (at equilibrium)
• Y = 𝐶 ̅ + bY + I
• Y = 500 + 0.9Y + 1000
• 0.1Y = 1,500
• Y = Rs.15,000 cr

• (2) K = 1/1-MPC
• = 1/1- 0.9
• = 1/ 0.1
• = 10
83.In an economy C = 200 + 0.5Y is the consumption function where
C = Consumption Expenditure, Y = National income, Investment
Expenditure is rs400 cr. Is the economy in equilibrium at an income
level rs 1500cr? Justify your answer
• Solution :
• Y = C + I (at equilibrium)
• Y = 200 + 0.5Y + 400
• 0.5Y = 400
• Y = 400/0.5
• Y = rs800 cr

• No the economy is not at equilibrium at an income level of rs1500

cr,It is in equilibrium at an income level of rs800 cr