Discussion
If an economy wants to increase aggregate income by ₹500 crore, what increase in investment will be required if the MPC is 0.4:
Answer: B
The investment multiplier is \(k = \dfrac{1}{1 - MPC}\). With an MPC of 0.4,
\[ k = \frac{1}{1 - 0.4} = \frac{1}{0.6} = 1.667 \]
The rise in income equals the rise in investment times the multiplier, so the investment needed for an income rise of 500 crore is
\[ \Delta I = \frac{500}{1.667} = 300\ \text{crore} \]
The value 833.3 crore comes from multiplying by 1.667 instead of dividing, 1250 crore from using a multiplier of 0.4, and 200 crore from a wrong multiplier of 2.5. The answer is 300 crore, option B.
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