Question

Read the following case carefully and answer the question. An economy experiences a rise in investment expenditure by ₹500 crore. The Marginal Propensity to Consume (MPC) is \(0.8\). Assume there are no leakages other than savings. What will be the total increase in national income?

• A. ₹1,500 crore
• B. ₹2,000 crore
• C. ₹2,500 crore
• D. ₹3,000 crore

Hint:

The closer MPC is to 1, the larger the multiplier. For example: \[ MPC=0.8 \Rightarrow K=5 \] \[ MPC=0.9 \Rightarrow K=10 \]

Answer 1

The Correct Option is C

Concept: This is a case-based question involving the Investment Multiplier. Such questions are increasingly common in CUET because they test conceptual understanding instead of direct memorization. The multiplier is calculated using: \[ K = \frac{1}{1-MPC} \] and \[ \Delta Y = K \times \Delta I \]

Step 1: Identify the given information. Increase in investment: \[ \Delta I = ₹500 \text{ crore} \] Marginal Propensity to Consume: \[ MPC = 0.8 \]

Step 2: Calculate the multiplier. \[ K = \frac{1}{1-0.8} \] \[ = \frac{1}{0.2} \] \[ = 5 \]

Step 3: Calculate the change in income. \[ \Delta Y = 5 \times 500 \] \[ = 2500 \] Thus: \[ \Delta Y = ₹2500 \text{ crore} \]

Step 4: Economic interpretation. The initial investment becomes income for producers. A portion of this income is consumed. That consumption becomes income for others. The process continues repeatedly. As a result: \[ ₹500 \text{ crore} \] creates a much larger increase in aggregate income: \[ ₹2500 \text{ crore} \]

Step 5: Verification. \[ 5 \times 500 = 2500 \] Correct.

Step 6: Final conclusion. \[ \boxed{₹2500 \text{ crore}} \] Hence, \[ \boxed{\text{Option (C)}} \]