Which of the following would leave the size of the investment multipl…

Which of the following would leave the size of the investment multiplier unchanged?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Both (1) and (2)

The multiplier is 1 / (1 − c). It depends only on the mpc. Changes in autonomous spending move the AD line but leave c unchanged.

Option (1) A rise in autonomous consumption — Correct. A rise in C̄ raises the intercept of AD. c is unchanged, so the multiplier is the same.

Option (2) A fall in the rate of interest that raises investment — Correct. A lower interest rate raises investment, which is autonomous spending. c is unchanged, so the multiplier is the same.

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”

NCERT extract

“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.”

“4.3.2 Effect of an Autonomous Change in Aggregate Demand on Income and Output We have seen that the equilibrium level of income depends on aggregate demand. Thus, if aggregate demand changes, the equilibrium level of income changes. This can happen in any one or combination of the following situations: 1. Change in consumption: this can happen due to (i) change in C̄ (ii) change in c . 2. Change in investment: we have assumed that investment is autonomous. However, it just means that it does not depend on income. There are a number of variables other than income which can affect investment. One important factor is availability of credit: easy availability of credit encourages investment. Another factor is interest rate: interest rate is the cost of investible funds, and at higher interest rates, firms tend to lower investment.”