In an open economy, the marginal propensity to consume is 0.75 and the marginal propensity to import is 0.25. If exports rise by Rs 40 crore, by how much will equilibrium income rise?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 80 crore
Given:
c = 0.75
m = 0.25
Rise in exports, ΔX = Rs 40 crore
A rise in exports changes income through the open economy multiplier.
\( \displaystyle \text{Multiplier} = \frac{1}{1 - c + m} = \frac{1}{1 - 0.75 + 0.25} = \frac{1}{0.5} = 2 \)
ΔY = 2 × 40 = Rs 80 crore
In an open economy part of each round of spending leaks into imports, so the multiplier is smaller.
Option (4) Rs 160 crore — this uses the closed economy multiplier, 1/(1 − 0.75) = 4.
NCERT (2026-27): “An increase in demand for our exports is an increase in aggregate demand for domestically produced output and will increase demand just as would an increase in government spending or an autonomous increase in investment. …” |
