The table shows the first rounds of the multiplier process after autonomous investment rises by Rs 100 crore in an economy:
| Round | Increment in consumption | Increment in aggregate demand | Increment in output/income |
|---|---|---|---|
| Round 1 | 0 | 100 | 100 |
| Round 2 | 60 | 60 | 60 |
| Round 3 | 36 | 36 | 36 |
What are the MPC of this economy and the total increase in output when the process is complete?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → MPC 0.6; total increase Rs 250 crore
In each round, people spend a fixed fraction (the MPC) of the extra income on consumption. Round 2 shows 60 spent out of 100:
\( \displaystyle MPC = \frac{60}{100} = 0.6 \)
The rounds go on until the extra demand dies out, so the total is the multiplier times the first rise:
\( \displaystyle \Delta Y = \frac{100}{1 - 0.6} = 250 \)
Option (1) MPC 0.4; total increase Rs 250 crore — Incorrect. 0.4 is the MPS; the share spent in each round is 0.6.
Option (2) MPC 0.6; total increase Rs 196 crore — Incorrect. 196 adds only the three rounds shown; the process continues to a total of 250.
Option (3) MPC 0.4; total increase Rs 166.7 crore — Incorrect. Both figures come from taking the MPC as 0.4.
Option (4) MPC 0.6; total increase Rs 250 crore — Correct. MPC 0.6 and a total rise of Rs 250 crore.
NCERT (2026-27): “4.3.3 The Multiplier Mechanism … In the above example the value of the extra output, 10, is distributed among various factors as factor payments and hence the income of the economy goes up by 10. 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. This process goes on, round after round, with producers increasing their output to clear the excess demand in each round and consumers spending a part of their additional income from this extra production on consumption items – thereby creating further excess demand in the next round.”
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