Two economies, P and Q, each have autonomous expenditure of Rs 100 crore. The mpc is 0.75 in P and 0.8 in Q. By how much is the equilibrium income of Q more than that of P?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs 100 crore
Equilibrium income is A / (1 − c). With the same autonomous spending, the economy with the higher mpc has the bigger multiplier and the higher income.
Economy P: income = 100 / (1 − 0.75) = 100 / 0.25 = 400
Economy Q: income = 100 / (1 − 0.8) = 100 / 0.2 = 500
Difference = 500 − 400 = Rs 100 crore
Option (1) Zero — Incorrect. Autonomous spending is the same, but the multipliers differ (4 and 5), so incomes differ.
Option (2) Rs 5 crore — Incorrect. This is 0.05 × 100, the difference in mpc times autonomous spending, with no multiplier.
Option (4) Rs 500 crore — Incorrect. This is the income of economy Q, not the difference.
NCERT (2026-27): “where ΔY is the total increment in final goods output and c = mpc . Observe that the size of the multiplier depends on the value of c . As c becomes larger the multiplier increases.” |