Autonomous investment rises by 10 and the mpc is 0.8. Match List-I (step of the multiplier mechanism) with List-II (amount):
| List-I | List-II | ||
|---|---|---|---|
| (A) | Increment in income in Round 1 | (I) | 0 |
| (B) | Increment in consumption in Round 2 | (II) | 8 |
| (C) | Increment in consumption in Round 1 | (III) | 10 |
| (D) | Total increment in output over all rounds | (IV) | 50 |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A) - (III), (B) - (II), (C) - (I), (D) - (IV)
In Round 1 only investment rises. From Round 2 on, each round’s extra income is spent in the ratio mpc = 0.8.
| List-I | List-II | Reason |
|---|---|---|
| (A) Increment in income in Round 1 | (III) 10 | The extra output of 10 is paid out as income. |
| (B) Increment in consumption in Round 2 | (II) 8 | 0.8 × 10 = 8 |
| (C) Increment in consumption in Round 1 | (I) 0 | The first rise is in investment, so consumption has not yet changed. |
| (D) Total increment in output over all rounds | (IV) 50 | 10 / (1 − 0.8) = 50 |
NCERT (2026-27): “4.3.3 The Multiplier Mechanism … In the above example the value of the extra output, 10, is distributed among various factors as factor payments and hence the income of the economy goes up by 10. When income increases by 10, consumption expenditure goes up by (0.8)10, since people spend 0.8 (= mpc) fraction of their additional income on consumption. Hence, in the next round, aggregate demand in the economy goes up by (0.8)10 and there again emerges an excess demand equal to (0.8)10.” “… In order to find out the total increase in output of the final goods, we must add up the infinite geometric series in the last column, i.e.,” |