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Question : The marginal propensity to consume (MPC) is 0.75. If there is an autonomous increase in investment spending of INR 1,000, what will be the change in equilibrium income?

Option 1: INR 750
    

Option 2: INR 1,000
   

Option 3: INR 1,333.33

 

Option 4: INR 4,000


Team Careers360 15th Jan, 2024
Answer (1)
Team Careers360 17th Jan, 2024

Correct Answer: INR 4,000


Solution : The correct answer is (D) INR 4,000

Given the marginal propensity to consume (MPC) of 0.75, the marginal propensity to save (MPS) can be calculated as 1 - MPC, which is 1 - 0.75 = 0.25.

The multiplier (K) can be calculated as:

K = 1 / MPS

  = 1 / 0.25

  = 4

To determine the change in equilibrium income, we multiply the autonomous change in spending (INR 1,000) by the multiplier:

Change in Equilibrium Income = Autonomous Change in Spending * Multiplier

                            = INR 1,000 * 4

                            = INR 4,000

Therefore, the change in equilibrium income will be INR 4,000. 

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