Autonomous investment in an economy rises. Arrange the following step…

Autonomous investment in an economy rises. Arrange the following steps of the multiplier process in the order in which they take place:

(A) Producers raise their planned output to meet the extra demand.
(B) An excess demand appears at the old equilibrium output.
(C) The value of the extra output is paid out as factor payments, so income rises.
(D) Households spend a part (mpc) of the extra income, which creates fresh excess demand.

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → (B), (A), (C), (D)

The rise in investment first creates excess demand. Producers meet it by producing more. The extra output is paid out as income, and households spend part of it, so excess demand appears again.

(B) An excess demand appears at the old equilibrium output. — At the old output, demand is now higher than output by the rise in investment.

(A) Producers raise their planned output to meet the extra demand. — Producers raise output to clear this excess demand.

(C) The value of the extra output is paid out as factor payments, so income rises. — The value of the extra output goes to factors as wages, interest, rent and profit.

(D) Households spend a part (mpc) of the extra income, which creates fresh excess demand. — Households spend the mpc fraction of the extra income. This fresh demand starts the next round.

NCERT (2026-27): “4.3.2 Effect of an Autonomous Change in Aggregate Demand on Income and Output … E1F measures the amount of excess demand that emerges in the economy as a result of the increase in autonomous expenditure. Thus, E1 no longer represents the equilibrium.”

“4.3.3 The Multiplier Mechanism … 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.”