The ratio of the total increment in equilibrium value of final goods…

The correct answer is Option (2) → Investment multiplier

Suppose firms spend Rs. 10 crore more on investment. That money becomes someone’s income; part of it is spent and becomes another person’s income, and so on, round after round, so output rises by more than the first Rs. 10 crore. The ratio of the total increment in equilibrium output to the initial increment in autonomous expenditure is the investment multiplier:

• Investment multiplier = ΔY ÷ ΔA = 1 ÷ (1 − c) = 1 ÷ s

Here c is the marginal propensity to consume and s the marginal propensity to save: the larger the share of extra income that is spent, the larger the multiplier. If c = 0.8, the multiplier is 1 ÷ 0.2 = 5, and the Rs. 10 crore of investment raises output by Rs. 50 crore.

Why the other options are incorrect

• Option (1) Consumption multiplier — Incorrect. There is no such term.

• Option (3) Saving multiplier — Incorrect. There is no such term.

• Option (4) Employment multiplier — Incorrect. The employment multiplier is the ratio of the total increase in employment to the initial increase in employment, a ratio of jobs, not of output to autonomous expenditure.

Note: A same/similar question was asked in CUET (UG) in the papers below.

* A similar question.