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CA Foundation · Business Economics · Indian Economy

An economy plans to achieve a growth rate of 8% per year. Under the Harrod-Domar framework used in Indian planning, the incremental capital-output ratio (ICOR) is 4. What investment rate (investment as % of GDP) is required?

The required investment rate is 32% of GDP. In the Harrod-Domar framework, growth equals the investment rate divided by ICOR, so the investment rate is growth multiplied by ICOR, which is 8% times 4. Dividing instead of multiplying would wrongly give 2%.

  1. A2%
  2. B16%
  3. C24%
  4. D32%Correct

Explanation

Growth rate = investment rate / ICOR, so investment rate = 8% x 4 = 32% of GDP. Option 2% results from dividing 8 by 4, which inverts the relationship. 16% comes from adding 8 and 8, and 24% from adding ICOR and growth mistakenly with a wrong base.

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