In an economy, C = 40 + 0.75Y and autonomous investment is Rs 60 crore. Investment now rises to Rs 70 crore and, at the same time, the marginal propensity to consume rises to 0.8. What is the rise in equilibrium income?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 150 crore
Both autonomous expenditure and the multiplier change here, so work out each equilibrium in full: Y = (C̄ + Ī) ÷ (1 − c).
Given:
C̄ = 40
Before: Ī = 60, c = 0.75
After: Ī = 70, c = 0.8
\( \displaystyle Y_{1} = \frac{40 + 60}{1 - 0.75} = \frac{100}{0.25} = 400 \)
\( \displaystyle Y_{2} = \frac{40 + 70}{1 - 0.8} = \frac{110}{0.2} = 550 \)
\( \displaystyle \Delta Y = 550 - 400 = 150 \)
Income rises by Rs 150 crore.
Option (2) Rs 40 crore — this applies only the old multiplier (4) to the rise in investment of 10 and misses the change in c.
Option (3) Rs 50 crore — this applies only the new multiplier (5) to the rise in investment of 10 and misses the change in autonomous spending at the old c.
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. …” “4.3.3 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.” |
