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CA Foundation · Business Economics · Determination of National Income

An economy has a balanced budget increase: government expenditure and lump-sum taxes both rise by ₹150 crore. With MPC = 0.6, what is the resulting change in equilibrium national income?

Income rises by ₹150 crore. The spending increase raises income by 2.5 × 150 = ₹375 crore, while the tax increase lowers it by 1.5 × 150 = ₹225 crore. The net effect is ₹150 crore, reflecting a balanced budget multiplier of one.

  1. A₹150 croreCorrect
  2. B₹225 crore
  3. C₹375 crore
  4. D₹0

Explanation

Expenditure multiplier = 1/0.4 = 2.5, so the spending effect is 375. Tax multiplier = −0.6/0.4 = −1.5, so the tax effect is −225. Net change = 375 − 225 = ₹150 crore, equal to the budget increase (balanced budget multiplier = 1). ₹375 crore ignores the taxes.

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