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
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.
