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Question : The marginal propensity to consume (MPC) is 0.8. If there is an autonomous increase in investment spending of INR 1,500, what will be the change in equilibrium income?

Option 1: INR 1,200
    

Option 2: INR 1,500
   

Option 3: INR 7,500

  

Option 4: INR 6,000


Team Careers360 7th Jan, 2024
Answer (1)
Team Careers360 11th Jan, 2024

Correct Answer: INR 7,500

  


Solution : The correct answer is (c)  INR 7,500

To calculate the change in equilibrium income resulting from an autonomous increase in investment spending, we need to use the multiplier effect. The multiplier (K) is given by the formula: K = 1 / (1 - MPC).

Given: MPC = 0.8

Autonomous increase in investment spending = INR 1,500

Multiplier (K) = 1 / (1 - 0.8) = 1 / 0.2 = 5

Change in equilibrium income = Multiplier * Autonomous increase in investment spending

Change in equilibrium income = 5 * 1500 = 7500

Therefore, the change in equilibrium income is INR 7,500.

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