OR (Question 17 alternative) Explain the working of the investment multiplier with the help of a table.

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Q. OR (Question 17 alternative) Explain the working of the investment multiplier with the help of a table.

Meghalaya MboseMBOSE Meghalaya Intermediate Board (Commerce) 2020Subjective· 6mImportance★★★★★

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Concept understanding — Parametric Line Shift

The Everyday Intuition

Imagine you're standing at a bus stop. The bus route is fixed — it always follows the same road. But one day, the bus company decides to move the entire route 200 metres to the east. The road hasn't changed, the bus still travels in a straight line, but every single point on that route has shifted by the same amount in the same direction.

That's a parametric line shift in economics.

Now think of a demand curve. You know that when the price of a good rises, the quantity demanded falls — you move along the curve. That's like walking along the bus route. But what if something else changes — say, your income increases? Then at every price, you now want to buy more of the good. The entire demand curve moves to the right. That's a parametric shift.

Note

Movement along the curve vs shift of the curve:

Movement along = price changes, other things constant.
Shift of the curve = a parameter (like income, tastes, technology) changes.

The Precise Meaning

In economics, a parameter is a factor that is held constant when we draw a curve, but which can change in the real world. For a demand curve, the parameters include:

Consumer income
Prices of related goods (substitutes and complements)
Tastes and preferences
Expectations about future prices

When any of these changes, the entire relationship between price and quantity changes. The curve doesn't just tilt — it shifts parallel (or nearly parallel) to its original position.

Q_d = a - bP

Why It Matters

This distinction is the single most common source of confusion in introductory economics. If you confuse a movement along a curve with a shift of the curve, you'll get every policy question wrong.

Example from NCERT Class 12 Macroeconomics:

When the government increases its spending ( $G$ ), the aggregate demand curve shifts right. That's a parametric shift — the parameter $G$ has changed. If you instead thought that a rise in the price level shifts the AD curve, you'd be wrong: a change in the price level causes a movement along the AD curve, not a shift.

Watch out

Common mistake: "When price falls, demand increases, so the demand curve shifts right."

No — a fall in price moves you down the same demand curve. The curve shifts only when a non-price factor changes.

The Two Key Types of Parametric Shifts

1. Parallel Shift (Change in Intercept) …

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k = 1/(1 − MPC); a round-by-round table shows how ΔI expands into a much larger ΔY.

The investment multiplier (k) measures the number of times a rise in equilibrium income (ΔY) is of the initial rise in investment (ΔI):

k = ΔY / ΔI = 1 / (1 − MPC) = 1 / MPS

Working, illustrated with a table (assume MPC = 0.8 and an initial increase in investment, ΔI = ₹100 crore):

Round	Extra income generated	Extra consumption (MPC × income)
1	100 (initial ΔI, received as income)	0.8 × 100 = 80
2	80 (spent by round 1's recipients, becomes someone's income)	0.8 × 80 = 64
3	64	0.8 × 64 = 51.2
...	...	...

Each round's spending becomes the next round's income, and only a fraction (MPC) of it is re-spent, so the rounds shrink and the process eventually converges. Summing the infinite geometric series:

…

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

CBSE 2023Set ANNUAL2 marks

Q. Distinguish between Supply Shocks and Stagflation.

›Reveal solution

A supply shock is a sudden, often unexpected, disturbance on the supply side of the economy; stagflation is the macroeconomic condition — simultaneous high inflation and stagnant output/high unemployment — that frequently results from an adverse supply shock.

Basis	Supply Shock	Stagflation
Meaning	A sudden, unanticipated event that changes the availability or cost of a key input (e.g., oil), shifting the Aggregate Supply curve	A sustained macroeconomic situation of high/rising inflation occurring together with stagnant growth and high unemployment
Nature	A cause/triggering event	An outcome/resulting state of the economy
Direction	Usually adverse (e.g., an oil price hike) shifts AS leftward/upward, raising costs	Characterised by simultaneously rising price level AND falling/stagnant output — unlike normal demand-pull inflation where output and prices move together

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Q.OR (Question 17 alternative) Explain the working of the investment multiplier with the help of a table.

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