If MPC is 0.8, the value of the investment multiplier is:
Options
A4
B5
C8
D2
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Determination of National IncomePYQ - May 2022 (Inter)Question 109 of 20
All Questions Correct Answer
✅ Option b — 5
All Options:
- A4
- B5
- C8
- D2
Detailed Solution & Explanation
To find the value of the investment multiplier, we need to understand its relationship with the marginal propensity to consume (MPC). The investment multiplier is calculated using the formula: 1 / (1 - MPC).
• Given that MPC is 0.8, we can substitute this value into the formula.
• The calculation becomes: 1 / (1 - 0.8) = 1 / 0.2 = 5.
This result shows that the value of the investment multiplier is 5, which means that for every unit of investment, the total income in the economy will increase by 5 units.
The correct answer is right because it is derived directly from the formula for the investment multiplier, which is based on the concept of the multiplier effect in economics, as explained by John Maynard Keynes.
Options like 4 and 2 are incorrect because they do not match the result obtained from the formula when MPC is 0.8.
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 SyllabusExam 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.
More Questions from Determination of National Income
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