Question

The marginal propensity to consume (MPC) in an economy is \(0.75\). If autonomous investment increases by ₹400 crore, the total increase in national income will be:

• A. ₹1200 crore
• B. ₹1400 crore
• C. ₹1600 crore
• D. ₹2000 crore

Hint:

For multiplier questions: \[ K=\frac{1}{1-MPC} \] and \[ \Delta Y=K\times\Delta I \] Higher MPC implies a larger multiplier.

Answer 1

The Correct Option is C

Concept: The Investment Multiplier is one of the most important concepts in Macroeconomics and has been repeatedly reported by students in recent CUET examinations. The multiplier shows how much national income changes when autonomous investment changes. Formula: \[ K=\frac{1}{1-MPC} \] where: \[ K=\text{Multiplier} \] \[ MPC=\text{Marginal Propensity to Consume} \] National income change: \[ \Delta Y = K\times\Delta I \]

Step 1: Identify the given values. \[ MPC=0.75 \] \[ \Delta I=₹400\text{ crore} \]

Step 2: Calculate the multiplier. \[ K = \frac{1}{1-0.75} \] \[ = \frac{1}{0.25} \] \[ =4 \] Thus: \[ K=4 \]

Step 3: Calculate change in income. \[ \Delta Y = 4\times400 \] \[ = 1600 \] Therefore: \[ \Delta Y = ₹1600\text{ crore} \]

Step 4: Economic interpretation. The initial investment of ₹400 crore creates income for producers. A portion of this income is spent on consumption. This expenditure becomes income for others. The process continues repeatedly. As a result: \[ ₹400\text{ crore} \] generates a much larger increase in national income: \[ ₹1600\text{ crore} \]

Step 5: Verification. \[ 4\times400=1600 \] The result is consistent with the multiplier formula.

Step 6: Final conclusion. \[ \boxed{\Delta Y=₹1600\text{ crore}} \] Hence, \[ \boxed{\text{Option (C)}} \]