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
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.
