Identify the correct chain of action from the following :
(A) Investment multiplier rises
(B) Economy grows
(C) MPC rises
(D) Income rises
Choose the correct answer from the options given below :
Answer & explanation
Correct answer: option 2
The correct answer is option (2) : (C), (A), (D), (B)
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MPC rises: When the Marginal Propensity to Consume (MPC) increases, it means that consumers are spending a larger fraction of any additional income they receive.
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Investment multiplier rises: The investment multiplier (k) is given by the formula k=1/ (1−MPC). If MPC rises, the denominator (1−MPC) becomes smaller, causing the multiplier to rise.
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Income rises: A higher investment multiplier means that any initial increase in investment leads to a larger increase in overall income.
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Economy grows: As income rises, it stimulates further economic activities and investments, leading to overall economic growth.