Determination of National IncomePYQ - July 2021 (Inter)Question 107 of 20

The multiplier effect explains how an initial increase in investment leads to a greater increase in:

Options

ASavings

BTaxes

CNational Income

DImports

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Correct Answer

✅ Option c — National Income

All Options:

ASavings
BTaxes
CNational Income
DImports

Detailed Solution & Explanation

The multiplier effect is a key concept in business economics that explains how an initial increase in investment leads to a greater increase in national income. • The process starts with an increase in investment, which leads to an increase in aggregate demand. • As aggregate demand increases, businesses respond by increasing production to meet the higher demand, which in turn leads to an increase in national income. • The increase in national income leads to an increase in consumption, as households have more disposable income to spend. • This increase in consumption further boosts aggregate demand, leading to another round of increased production and national income. The correct answer is national income because the multiplier effect explains how an initial increase in investment leads to a greater increase in national income, as described by the Keynesian multiplier theory. • Options like savings and taxes are incorrect because they are not the primary outcome of the multiplier effect, although they may be affected indirectly. • For example, an increase in national income may lead to an increase in savings, but this is not the direct result of the multiplier effect.

About This Chapter: National Income

Paper

Paper 4: Business Economics

Weightage

15%

Key Topics

Aggregates, Measurement, Keynesian Theory

A crucial chapter covering national income aggregates like GDP, GNP, NDP, NNP, and the methods of measuring national income (Income, Expenditure, and Output methods). It also introduces Keynesian Theory including the concepts of Aggregate Demand, Consumption Function, and the Multiplier.

View Official ICAI Syllabus

Exam Strategy Tip

Practice numerical questions on GDP/GNP calculations and the Multiplier. These are guaranteed marks in every exam. Also understand the circular flow of income clearly.

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