Assuming the marginal propensity to consume (MPC) is 0.6, the government decides to increase its expenditure by Rs. 1500 crore while keeping taxes unchanged. What will be the expected increase in aggregate demand using the fiscal multiplier?

Step-by-step solution

1. Step 1: Compute the fiscal multiplier: $\frac{1}{1-MPC}=\frac{1}{1-0.6}=\frac{1}{0.4}=2.5$.
2. Step 2: Multiply the change in government expenditure by the multiplier: $1500\times 2.5=3750$ crore.
3. Step 3: Hence the correct option is D, which states Rs. 3750 crore.

Concept tested: Fiscal multiplier effect

Published 13 October 2026 · How this solution was prepared and checked