CA Foundation · Business Economics · Determination of National Income
Autonomous investment in an economy rises by ₹50 crore. If the marginal propensity to save is 0.2, by how much will equilibrium income rise in a two-sector model?
Income rises by ₹250 crore. The investment multiplier equals one divided by the marginal propensity to save, which is 1/0.2 = 5. Multiplying this by the ₹50 crore increase in autonomous investment gives a total rise in equilibrium income of ₹250 crore.
- A₹10 crore
- B₹62.5 crore
- C₹200 crore
- D₹250 croreCorrect
Explanation
The multiplier k = 1/MPS = 1/0.2 = 5. The change in income = 5 × 50 = ₹250 crore. The figure ₹200 crore comes from using 1/(1 − 0.8 ... ) wrongly as 4, i.e. treating the multiplier as MPC/MPS.
Did you get it right without looking?
One question tells you little. A timed set on Determination of National Income shows your real accuracy, how long you take and where you lose marks.
More Determination of National Income questions
- In an economy, the consumption function is C = 200 + 0.75Y and planned investment is ₹400 crore. What is the equilibrium level of national i…
- In a simple two-sector economy, which of the following correctly describes the equilibrium condition for national income?
- Which of the following items is excluded from the calculation of Gross Domestic Product (GDP) using the expenditure method?
- In a three-sector economy with no foreign trade, C = 100 + 0.8Yd, I = ₹300 crore, G = ₹200 crore, and taxes are a lump sum T = ₹100 crore. W…
- Which of the following is correctly identified as a transfer payment and should be excluded from the measurement of National Income?
- In a simple two-sector economy, the marginal propensity to consume (MPC) is 0.75. If autonomous investment rises by ₹200 crore, by how much …