In an economy, a rise of Rs 100 crore in autonomous investment raises equilibrium income by Rs 400 crore. If the MPC of this economy now rises by 0.05, what will the new investment multiplier be?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → 5
The multiplier is ΔY / ΔI, and it also equals 1 / (1 − c).
\( \displaystyle k = \frac{400}{100} = 4 \)
\( \displaystyle 1 - c = \frac{1}{4} = 0.25 \)
\( c = 0.75 \)
The MPC rises by 0.05 to 0.8:
\( \displaystyle k = \frac{1}{1 - 0.8} = 5 \)
Option (1) 5 — Correct. The new multiplier is 5.
Option (2) 4.2 — Incorrect. 4.2 adds 0.05 × 4 to the old multiplier; the multiplier does not rise in step with the MPC.
Option (3) 4 — Incorrect. 4 is the old multiplier; a higher MPC raises it.
Option (4) 20 — Incorrect. 20 = 1 / 0.05 uses the change in MPC instead of 1 − MPC.
NCERT (2026-27): “4.3.3 The Multiplier Mechanism … The increment in equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier of the economy. Recalling that 10 and 0.8 represent the values of ΔI = ΔA and mpc, respectively, the expression for the multiplier can be explained as”
“where ΔY is the total increment in final goods output and c = mpc . Observe that the size of the multiplier depends on the value of c . As c becomes larger the multiplier increases.” |
