Question

If the marginal propensity to consume (c) is 0.8 and the government increases spending by \[\Delta G = 100\], the change in equilibrium income \[\Delta Y\] will be:

पर्याय

• 125

• 80

• 400

• 500

Answer 1

Using \[\Delta Y=\frac{1}{1-c}\Delta G\], the multiplier is \[\frac{1}{1-0.8}=\frac{1}{0.2}=5\]. Therefore, \[\Delta Y = 5 \times 100 = 500\], illustrating the multiplier effect where income rises by a larger amount than the spending increase.