In an economy with a marginal propensity to consume of 0.8, autonomous consumption falls from Rs 50 crore to Rs 40 crore. At the same time, autonomous investment rises from Rs 50 crore to Rs 80 crore. What is the change in equilibrium income?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → A rise of Rs 100 crore
Autonomous consumption and autonomous investment together make up autonomous expenditure, Ā. Income changes by the net change in Ā × the multiplier.
Given:
MPC, c = 0.8
C̄: 50 → 40 (a fall of 10)
Ī: 50 → 80 (a rise of 30)
\( \displaystyle \Delta \bar{A} = -10 + 30 = 20 \)
\( \displaystyle k = \frac{1}{1 - 0.8} = 5 \)
\( \displaystyle \Delta Y = 5 \times 20 = 100 \)
Income rises by Rs 100 crore.
Option (1) A rise of Rs 150 crore — this counts only the rise in investment.
Option (2) A rise of Rs 200 crore — this adds the two changes instead of netting them.
NCERT (2026-27): “4.2 Determination of Income in Two-sector Model … This equation can be further simplified by adding up the two autonomous terms, C̄ and Ī, making it Y = Ā + c.Y where Ā = C̄ + Ī is the total autonomous expenditure in the economy. In reality, these two components of autonomous expenditure behave in different ways. C̄, representing subsistence consumption level of an economy, remains more or less stable over time. However, Ī has been observed to undergo periodic fluctuations. …” “4.3.2 Effect of an Autonomous Change in Aggregate Demand on Income and Output We have seen that the equilibrium level of income depends on aggregate demand. Thus, if aggregate demand changes, the equilibrium level of income changes. This can happen in any one or combination of the following situations: 1. Change in consumption: this can happen due to (i) change in C̄ (ii) change in c . 2. Change in investment: we have assumed that investment is autonomous. However, it just means that it does not depend on income. There are a number of variables other than income which can affect investment. One important factor is availability of credit: easy availability of credit encourages investment. Another factor is interest rate: interest rate is the cost of investible funds, and at higher interest rates, firms tend to lower investment.” “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”
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