CBSE 2025, Set 1

Question

Suppose for an economy, government proposes project for construction of expressways with an incremental investment of ₹ 1200 crore. Assuming, 80% of increase in income is spent on consumption.

Estimate the following on the basis of above information:
(a) Change in income ($\Delta Y$)
(b) Change in consumption ($\Delta C$).

Edvaya · Accepted Answer

The correct answer is Subjective. Given, Change in Investment ($\Delta I$) = ₹ 1,200 crore
Marginal Propensity to Consume (MPC) = 0.8

**(a) Change in Income ($\Delta Y$)**
As we know,
Investment Multiplier $(K) = \frac{1}{1 - MPC}$
$= \frac{1}{1 - 0.8} = 5$

Change in Income ($\Delta Y$) = $K 	imes 	ext{Change in Investment } (\Delta I)$
$= 5 	imes 1,200$
Change in Income ($\Delta Y$) = **₹ 6,000 crore**

**(b) Change in Consumption ($\Delta C$)**
Marginal Propensity to Consume (MPC) = $\frac{	ext{Change in Consumption } (\Delta C)}{	ext{Change in Income } (\Delta Y)}$
$0.8 = \frac{\Delta C}{6,000}$
Change in Consumption ($\Delta C$) = **₹ 4,800 crore**

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Economics > Introductory Macroeconomics > Determination Of Income Employment

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