CA Foundation · Business Economics · Determination of National Income
In a three-sector economy with lump-sum taxes, MPC = 0.75. The government cuts lump-sum taxes by ₹80 crore, with government spending unchanged. By how much does equilibrium income increase?
Income rises by ₹240 crore. The lump-sum tax multiplier has magnitude MPC/(1 − MPC) = 0.75/0.25 = 3, and a tax cut raises income. Multiplying ₹80 crore by 3 gives ₹240 crore. Using the spending multiplier of 4 would give ₹320 crore, which is wrong.
- A₹320 crore
- B₹240 croreCorrect
- C₹60 crore
- D₹180 crore
Explanation
The tax multiplier magnitude = MPC/(1 − MPC) = 0.75/0.25 = 3. A tax cut raises income by 3 × 80 = ₹240 crore. ₹320 crore wrongly applies the expenditure multiplier of 4, ignoring that part of the tax cut is saved at first.
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