IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features
In a simple Keynesian model with no government or foreign trade, the marginal propensity to consume is 0.75. A private firm in India raises autonomous investment by Rs 200 crore. What is the resulting increase in equilibrium national income?
Rs 800 crore. The multiplier is 1 divided by (1 minus 0.75), which equals 4, so a Rs 200 crore rise in autonomous investment raises equilibrium income by 4 times 200, or Rs 800 crore. Rs 600 crore wrongly counts only the induced consumption.
- ARs 150 crore
- BRs 200 crore
- CRs 600 crore
- DRs 800 croreCorrect
- Rs 1,000 crore
Explanation
The multiplier is 1/(1-MPC) = 1/0.25 = 4. The income increase is 4 x 200 = Rs 800 crore. Check: the successive rounds 200 + 150 + 112.5 + ... sum to 200/0.25 = 800. Rs 600 crore comes from using MPC/(1-MPC) = 3, which gives only the induced consumption rise and omits the initial investment.
Did you get it right without looking?
One question tells you little. A timed set on Main economic schools and their key features shows your real accuracy, how long you take and where you lose marks.
More Main economic schools and their key features questions
- The Lucas critique is best described as which of the following arguments?
- According to New Classical economists, why is a systematic and fully anticipated increase in the money supply unlikely to raise real output …
- Which statement best reflects the institutional school of economics in its approach to analysing firms and markets?
- Which of the following is a normative economic statement?
- Which statement best describes the Marxian view of the relationship between the 'base' and the 'superstructure' in historical materialism?
- After the 2008 global financial crisis, many economists criticised the efficient markets and rational expectations framework underlying pre-…