CA Foundation · Business Economics · Determination of National Income
In a two-sector Keynesian model, the marginal propensity to consume is 0.8 and the economy is currently in equilibrium at an income of ₹2,000 crore. Full-employment income is ₹2,500 crore. By how much must autonomous investment increase to reach full employment?
Autonomous investment must rise by ₹100 crore. The income gap to full employment is ₹500 crore and the multiplier with MPC of 0.8 is 5, so the needed increase in investment is 500 divided by 5, which is 100.
- A₹500 crore
- B₹400 crore
- C₹100 croreCorrect
- D₹125 crore
Explanation
The income gap is 2,500 - 2,000 = ₹500 crore. The multiplier is 1/(1 - 0.8) = 5. Required investment rise = 500/5 = ₹100 crore. Check: 100 x 5 = 500. The ₹500 crore option ignores the multiplier, and ₹125 crore wrongly uses a multiplier of 4.
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