Assertion (A): When autonomous expenditure stays at 60 and the mpc falls from 0.75 to 0.5, equilibrium output falls from 240 to 120.
Reason (R): A fall in the mpc lowers the investment multiplier, in this case from 4 to 2.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
Assertion (A): When autonomous expenditure stays at 60 and the mpc falls from 0.75 to 0.5, equilibrium output falls from 240 to 120. — True. Y = A / (1 − c). With c = 0.75, Y = 60 / 0.25 = 240. With c = 0.5, Y = 60 / 0.5 = 120.
Reason (R): A fall in the mpc lowers the investment multiplier, in this case from 4 to 2. — True. The multiplier is 1 / (1 − c). It is 1 / 0.25 = 4 at c = 0.75 and 1 / 0.5 = 2 at c = 0.5.
A is about the fall in equilibrium output. R is about the fall in the multiplier.
Why R explains A? Equilibrium output is autonomous spending times the multiplier. Autonomous spending stays at 60, so output falls only because the multiplier falls: 60 × 4 = 240 becomes 60 × 2 = 120.
NCERT (2026-27): “4.3.3 The Multiplier Mechanism … The increment in equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier of the economy. Recalling that 10 and 0.8 represent the values of ΔI = ΔA and mpc, respectively, the expression for the multiplier can be explained as”
“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.” |
