In an open economy, consumption is Rs 1,300 crore, investment Rs 200…

The correct answer is Option (3) → Income becomes Rs 1,700 crore and the trade deficit becomes Rs 30 crore.

Given:

Consumption, C = Rs 1,300 crore

Investment, I = Rs 200 crore

Government spending, G = Rs 150 crore

Exports, X = Rs 120 crore

Imports, M = Rs 170 crore

Marginal propensity to consume, c = 0.8

Marginal propensity to import, m = 0.2

Rise in exports, ΔX = Rs 40 crore

First find income and the trade gap before the change.

Y = C + I + G + X − M = 1,300 + 200 + 150 + 120 − 170 = 1,600

Net exports = 120 − 170 = −50, a trade deficit of 50

Now apply the open economy multiplier.

\( \displaystyle \text{Multiplier} = \frac{1}{1 - c + m} = \frac{1}{1 - 0.8 + 0.2} = \frac{1}{0.4} = 2.5 \)

ΔY = 2.5 × 40 = 100

Y = 1,600 + 100 = Rs 1,700 crore

Higher income raises imports too:

ΔM = m × ΔY = 0.2 × 100 = 20

New exports = 120 + 40 = 160

New imports = 170 + 20 = 190

Trade deficit = 190 − 160 = Rs 30 crore

Option (2) — income of 1,800 uses the closed multiplier 5.

Option (4) — a deficit of 10 leaves out the induced imports.