The increase in income in an economy is four times more than the increase in investment. What is the value of marginal propensity to consume in this economy?

0.8

The correct answer is Option (3) → 0.8

Note: The given question is as per NTA. The calculation on the basis of which the NTA has arrived at this solution is given below:

Increase in income is 4 times "more" than the increase in investment. It means if investment increase by 100, the increase in income will be Rs 500 i.e. is 100 + 4 times 100.
That means the investment multiplier (K) = Change in  Income/Change in Investment = 5.

K = 1/ (1- MPC)

5 = 1/ (1- MPC)

1- MPC = 1/5

MPC =1 - 1/5 = 4/5 = 0.80

However, the answer can be 0.75 depending upon the interpretation as explained below:

The phrase “increase in income is four times more than the increase in investment” can be interpreted in standard economics as: ΔY=4×ΔI

Multiplier (k) = ΔY / ΔI

Given: Increase in income is four times the increase in investment
⇒ k = 4

Now,
k = 1 / (1 − MPC)

So,
4 = 1 / (1 − MPC)
⇒ 1 − MPC = 1/4
⇒ MPC = 3/4 = 0.75