Match List-I (a change in a two-sector economy, other things remaining equal) with List-II (its effect):
| List-I | List-II | ||
|---|---|---|---|
| (A) | A rise in autonomous investment | (I) | Equilibrium income rises; the multiplier is unchanged |
| (B) | A rise in the mpc | (II) | Equilibrium income falls; the multiplier falls |
| (C) | A fall in autonomous consumption | (III) | Equilibrium income rises; the multiplier rises |
| (D) | A rise in the mps | (IV) | Equilibrium income falls; the multiplier is unchanged |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A) - (I), (B) - (III), (C) - (IV), (D) - (II)
Equilibrium income is A / (1 − c), and the multiplier is 1 / (1 − c). A change in autonomous spending changes income only. A change in c changes both.
| List-I | List-II | Reason |
|---|---|---|
| (A) A rise in autonomous investment | (I) Equilibrium income rises; the multiplier is unchanged | Autonomous spending rises, so income rises. c is unchanged, so the multiplier is unchanged. |
| (B) A rise in the mpc | (III) Equilibrium income rises; the multiplier rises | A higher c raises 1 / (1 − c), and income rises with it. |
| (C) A fall in autonomous consumption | (IV) Equilibrium income falls; the multiplier is unchanged | Autonomous spending falls, so income falls. The multiplier still depends only on c. |
| (D) A rise in the mps | (II) Equilibrium income falls; the multiplier falls | A higher mps is a lower c. The multiplier 1/s falls, and income falls. |
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”
“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.” “Paradox of Thrift … When A changes the line shifts upwards or downwards in parallel. When c changes, however, the line swings up or down. An increase in mps, or a decline in mpc, reduces the slope of the AD line and it swings downwards. We depict the situation in Fig. 4.8.” |
