The marginal propensity to consume is 0.6 and taxes are lump-sum. The government raises transfer payments by 40. By how much will equilibrium income rise?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → 60
Given:
MPC, c = 0.6
Rise in transfers, ΔTR = 40
The transfer multiplier is c/(1 − c), because households spend only a part c of a transfer.
Transfer multiplier = 0.6 ÷ 0.4 = 1.5
ΔY = 1.5 × 40 = 60
Option (2) 100 — this uses the expenditure multiplier 2.5, which applies to government purchases, spent in full.
NCERT (2026-27): “Transfers: … so output will rise by less than the amount by which it increases when government expenditure increases because a part of any increase in transfer payments is saved. …” |