Skip to content

CA Foundation · Business Economics · Determination of National Income

In a three-sector economy, the government raises its expenditure on public works by ₹100 crore, with taxes unchanged (lump-sum). If the marginal propensity to consume out of disposable income is 0.8, by how much does equilibrium national income rise?

Income rises by ₹500 crore. With lump-sum taxes the government expenditure multiplier is 1/(1 − MPC), which is 1/0.2 = 5. Multiplying the ₹100 crore increase in spending by 5 gives ₹500 crore. The ₹400 crore option uses the tax multiplier magnitude by mistake.

  1. A₹400 crore
  2. B₹500 croreCorrect
  3. C₹100 crore
  4. D₹125 crore

Explanation

With lump-sum taxes, the government expenditure multiplier = 1/(1 − MPC) = 1/(1 − 0.8) = 5. Change in income = 5 × 100 = ₹500 crore. The figure ₹400 crore wrongly uses MPC/(1 − MPC), which is the tax-type multiplier magnitude, not the expenditure multiplier.

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.

Practise Determination of National IncomeFree diagnostic mock

More Determination of National Income questions