An increase of Rs 20,000 in investment in an economy results in an increase of Rs 50,000 in income. What is the value of MPS?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → 0.4
Given:
ΔI = Rs 20,000
ΔY = Rs 50,000
The multiplier is ΔY / ΔI, and it also equals 1 / MPS.
\( \displaystyle k = \frac{50{,}000}{20{,}000} = 2.5 \)
\( \displaystyle MPS = \frac{1}{2.5} = 0.4 \)
The MPS is 0.4.
Option (4) 2.5 — this is the multiplier, not the MPS.
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”
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