The table below follows the multiplier mechanism, where autonomous investment rises by 10 and the mpc is 0.8:
| Round | Consumption | Aggregate Demand | Output/Income |
|---|---|---|---|
| Round 1 | 0 | 10 | 10 |
| Round 2 | 8 | 8 | 8 |
| Round 3 | ? | ? | ? |
What will be the increment in output/income in Round 3?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → 6.4
In each round, the extra income of the last round is spent in the ratio mpc. So each entry is 0.8 times the one before.
\( \text{Round 3} = 0.8 \times 8 = (0.8)^2 \times 10 = 6.4 \)
Option (3) 5.12 — this is the increment of Round 4.
Option (4) 8 — this is the increment of Round 2.
NCERT (2026-27): “4.3.3 The Multiplier Mechanism … When income increases by 10, consumption expenditure goes up by (0.8)10, since people spend 0.8 (= mpc) fraction of their additional income on consumption. Hence, in the next round, aggregate demand in the economy goes up by (0.8)10 and there again emerges an excess demand equal to (0.8)10. Therefore, in the next production cycle, producers increase their planned output further by (0.8)10 to restore equilibrium. When this extra output is distributed among factors, the income of the economy goes up by (0.8)10 and consumption demand increases further by (0.8)210, once again creating excess demand of the same amount.” |