Question

In an economy, Autonomous Consumption is \(100\) crore and the Marginal Propensity to Consume (MPC) is \(0.75\). If investment increases by \(80\) crore, then the increase in equilibrium income will be:

• A. \(240\) crore
• B. \(300\) crore
• C. \(320\) crore
• D. \(400\) crore

Hint:

For CUET questions on multiplier: \[ k=\frac{1}{1-MPC} \] \[ \Delta Y=k\Delta I \] Higher MPC \(\Rightarrow\) Higher Multiplier \(\Rightarrow\) Larger increase in National Income.

Answer 1

The Correct Option is C

Concept: According to Keynesian Income Determination Theory, a change in autonomous expenditure causes a multiplied change in equilibrium income. The size of this multiplied effect is measured through the Investment Multiplier. The multiplier is given by: \[ k=\frac{1}{1-MPC} \] and \[ \Delta Y=k\times \Delta I \] where:
• \(k\) = Investment Multiplier
• \(MPC\) = Marginal Propensity to Consume
• \(\Delta I\) = Change in Investment
• \(\Delta Y\) = Change in Equilibrium Income

Step 1: Calculate the value of Multiplier. Given: \[ MPC=0.75 \] Therefore, \[ k=\frac{1}{1-0.75} \] \[ k=\frac{1}{0.25} \] \[ k=4 \] This means every additional rupee of investment generates four rupees of income in the economy.

Step 2: Calculate change in equilibrium income. Increase in investment: \[ \Delta I=80 \text{ crore} \] Applying multiplier formula: \[ \Delta Y=k\times \Delta I \] \[ \Delta Y=4\times80 \] \[ \Delta Y=320 \text{ crore} \]

Step 3: Interpret the result. An increase of \(80\) crore in investment initiates multiple rounds of spending and income generation. As a result, the final increase in national income becomes four times the initial increase in investment. Hence, \[ \boxed{\Delta Y=320\text{ crore}} \] Therefore, option (C) is correct.