In the multiplier analysis of the budget, ‘equilibrium income’ refers to:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → the final income reached once all the rounds of the multiplier have worked themselves out
A rise in spending raises income in rounds: income, then consumption, then income again. Equilibrium income is the final income after all these rounds are over.
The first-round income is only the start of the process. A balanced budget, with taxes equal to spending, is a different idea and does not define equilibrium income.
NCERT (2026-27): “Box 5.1: Fiscal Policy … A balanced budget multiplier of unity implies that a 100 increase in G financed by 100 increase in taxes increases income by just 100. This can be seen from Example 1 where an increase in G by 100 increases output by 500. A tax increase would reduce income by 400 with the net increase of income equal to 100. The equilibrium income refers to the final income that one arrives at in a period sufficiently long for all the rounds of the multipliers to work themselves out. We find that output increases by exactly the amount of increased G with no induced consumption spending due to increase in taxes. …” |