Consider the following statements about the multiplier mechanism:
(A) In each round, producers raise their output to clear the excess demand of that round.
(B) When income rises, consumption rises by the mpc fraction of the extra income.
(C) The increments in output become larger in each round, so the process never settles.
(D) The value of the extra output is distributed among factors of production, so the income of the economy rises by the same amount.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
(A) In each round, producers raise their output to clear the excess demand of that round. — Correct. Producers expand output each round to meet the new excess demand.
(B) When income rises, consumption rises by the mpc fraction of the extra income. — Correct. People spend the MPC share of their extra income.
(C) The increments in output become larger in each round, so the process never settles. — Incorrect. Each round is the MPC times the last, so the increments get smaller and add up to a finite total.
(D) The value of the extra output is distributed among factors of production, so the income of the economy rises by the same amount. — Correct. The value of output is paid out as wages, interest, rent and profit, so income rises by the same amount.
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. Therefore, in the next production cycle, producers increase their planned output further by (0.8)10 to restore equilibrium. When this extra output is distributed among factors, the income of the economy goes up by (0.8)10 and consumption demand increases further by (0.8)210, once again creating excess demand of the same amount. This process goes on, round after round, with producers increasing their output to clear the excess demand in each round and consumers spending a part of their additional income from this extra production on consumption items – thereby creating further excess demand in the next round.” |