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CA Foundation · Business Economics · Determination 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 will equilibrium national income rise?

Equilibrium income rises by ₹800 crore. The investment multiplier is 1 divided by (1 minus MPC), which is 1/0.25 = 4. Multiplying the ₹200 crore increase in autonomous investment by 4 gives the total rise in national income.

  1. A₹150 crore
  2. B₹266.67 crore
  3. C₹800 croreCorrect
  4. D₹600 crore

Explanation

The multiplier k = 1/(1 - MPC) = 1/(1 - 0.75) = 4. The rise in income = 4 × ₹200 crore = ₹800 crore. Choosing ₹600 crore comes from using MPC/(1 - MPC) = 3, which is the multiplier for the consumption component only, not the investment multiplier.

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