Question

(a) For a hypothetical economy, the government incurs an additional investment expenditure of ₹ 5,000 crore. Assuming that the Marginal Propensity to Save (MPS) becomes half from its present level of 20%, estimate the change in income due to this fall in Marginal Propensity to Save (MPS). (b) State the meaning of autonomous investment.

Accepted Answer

(a) Given, Change in Investment (ΔI) = ₹ 5,000 crore MPS Investment Multiplier K = 1/MPS Change in Income (ΔY) Δ Y = K × Δ I (₹ in crore) 0.20 1/0.2 = 5 5 x 5,000 = 25,000 0.10 ( 1/2 x 20%) 1/0.1 = 10 10 x 5,000 = 50,000 Hence, with the change in MPS from 0·20 to 0·10, Increase in Income (ΔY) = 50,000 – 25,000 = ₹ 25,000 crore (b) Investments which are independent of the level of income in an economy, are known as Autonomous Investment.

MPS	Investment Multiplier $\displaystyle K = \frac{1}{MPS}$	Change in Income (ΔY) $\displaystyle \Delta Y = K \times \Delta I$ (₹ in crore)
$\displaystyle 0.20$	$\displaystyle \frac{1}{0.2} = 5$	$\displaystyle 5$ x $\displaystyle 5,000$ = $\displaystyle 25,000$
$\displaystyle 0.10$ ($\displaystyle \frac{1}{2}$ x $\displaystyle 20$%)	$\displaystyle \frac{1}{0.1} = 10$	$\displaystyle 10$ x $\displaystyle 5,000$ = $\displaystyle 50,000$

Marking-scheme solution

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(a) For a hypothetical economy, the government incurs an additional investment expenditure of ₹ 5,000 crore. Assuming that the Marginal Propensity to…

Marking-scheme solution

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