If the marginal propensity to consume (MPC) in an economy is 0.75 and the government increases its expenditure by Rs. 200 billion, by how much will the equilibrium national income rise?

Step-by-step solution

1. Step 1: Compute the Keynesian multiplier: $m=\frac{1}{1-MPC}=\frac{1}{1-0.75}=\frac{1}{0.25}=4$.
2. Step 2: Multiply the change in government spending by the multiplier: $\Delta Y=m\times \Delta G=4\times 200=800$.
3. Step 3: State the increase in national income: $800$ billion rupees.

Concept tested: Keynesian multiplier effect

Published 16 October 2026 · How this solution was prepared and checked