In an economy, C = 20 + 0.75Y. Autonomous investment rises from 30 to 40. Which of the following statements is NOT correct?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → The investment multiplier in this economy is 5.
Equilibrium income is Y = (C̄ + I) / (1 − c), and the multiplier is 1 / (1 − c).
\( \displaystyle Y_1 = \frac{20 + 30}{1 - 0.75} = 200 \)
\( \displaystyle Y_2 = \frac{20 + 40}{0.25} = 240 \)
\( \displaystyle k = \frac{1}{1 - 0.75} = 4 \)
Option (1) The equilibrium income before the rise in investment is 200. — True. Y = 50 / 0.25 = 200.
Option (2) The rise in equilibrium income is greater than the rise in investment. — True. Income rises by 40, more than the rise of 10 in investment.
Option (3) The investment multiplier in this economy is 5. — False. The multiplier is 4, not 5. A check: 4 × 10 = 40, the rise in income.
Option (4) The equilibrium income after the rise in investment is 240. — True. Y = 60 / 0.25 = 240.
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”
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