Suppose for a hypothetical economy : C = 100 + 0·75Y (where C = Consumption and Y = Income); I₀ = 400 (I₀ = Au

Question 63 of 104

Q. Suppose for a hypothetical economy : C = 100 + 0\cdot75Y (where C = Consumption and Y = Income); I₀ = 400 (I₀ = Autonomous Investment). Value of Investment Multiplier (K) would be ________. (Choose the correct alternative to fill in the blank) (A) 5 (B) 4 (C) 6 (D) 3

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The investment multiplier quantifies how much national income changes for a given change in investment, and its value is determined by the Marginal Propensity to Consume (MPC). In this case, an MPC of $0.75$ leads to an investment multiplier of $4$ .

The investment multiplier is a crucial concept in Keynesian economics that explains how an initial change in investment can lead to a much larger change in the economy's total income and output. This phenomenon occurs because spending by one person becomes income for another, who then spends a portion of that income, and so on, creating a chain reaction of expenditure.

The size of this multiplier effect depends directly on the Marginal Propensity to Consume (MPC), which is the fraction of additional income that households spend rather than save. If people spend a larger portion of any extra income they receive, the multiplier effect will be stronger, as more of the initial investment will circulate through the economy. Conversely, if people save a larger portion (meaning a lower MPC), the multiplier will be smaller.

To calculate the investment multiplier (K), we first need to identify the Marginal Propensity to Consume (MPC) from the given consumption function.

Identify the Marginal Propensity to Consume (MPC):

The general form of a linear consumption function is $C = \bar{C} + cY$ , where $C$ is consumption, $\bar{C}$ is autonomous consumption (consumption independent of income), $c$ is the Marginal Propensity to Consume (MPC), and $Y$ is income.

Given the consumption function: $C = 100 + 0.75Y$ .

Comparing this with the general form, we can see that the MPC ( $c$ ) is $0.75$ .
Apply the Investment Multiplier Formula: …

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

CA Foundation 2026Set may-20261 markMCQ
$Q. There is an increase in the national income by ₹ 2,000 crores when there is an increase in investments by ₹ 1,600 crores. Calculate the marginal propensity to consume. (A) 0.80 (B) 0.50 (C) 0.20 (D) 0.40$
›Reveal solutionSolution

Multiplier k = ΔY/ΔI = 1.25 ⇒ MPC = 1 − 1/k = 0.20.

Step 1 — Find the multiplier
$k = \frac{\Delta Y}{\Delta I} = \frac{2000}{1600} = 1.25$
Step 2 — Relate the multiplier to MPC
$k = \frac{1}{1-\text{MPC}}$
Step 3 — Solve for MPC
$1.25 = \frac{1}{1-\text{MPC}}$ $1-\text{MPC} = \frac{1}{1.25} = 0.8$ $\text{MPC} = 1 - 0.8 = 0.20$
Step 4 — Eliminate the others …
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CA Foundation 2026Set may-20261 markMCQ
$Q. Which of the following statements correctly explains the relationship between Marginal Propensity to Consume (MPC), Marginal Propensity to Save (MPS), and the value of the investment multiplier? (A) Higher the MPC more will be the value of investment multiplier (B) Higher the MPS more will be the value of investment multiplier (C) Lower the MPC more will be the value of investment multiplier (D) Lower the MPS less will be the value of investment multiplier$
›Reveal solutionSolution
Multiplier k = 1/(1 − MPC) = 1/MPS, so a higher MPC (lower MPS) gives a larger multiplier — statement (A).

Step 1 — State the multiplier formula
$k = \dfrac{1}{1 - MPC} = \dfrac{1}{MPS}$
with the identity MPC + MPS = 1.

Step 2 — See how k responds to MPC and MPS

A higher MPC makes the denominator (1 − MPC) smaller, so k is larger.

Equivalently, a higher MPS makes k = 1/MPS smaller.

Step 3 — Test each statement

(A) Higher MPC → higher multiplier — TRUE, matches the formula.

(B) Higher MPS → higher multiplier — false (higher MPS lowers k).

(C) Lower MPC → higher multiplier — false (lower MPC lowers k).

(D) Lower MPS → lower multiplier — false (lower MPS raises k).

Step 4 — Numerical check …
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CA Foundation 2025Set jan-20251 markMCQ
$Q. In an economy investment expenditure is increased by ₹ 300 crores and marginal propensity to consume is 0.6. Calculate the total increase in income. (A) ₹ 300 crores (B) ₹ 100 crores (C) ₹ 650 crores (D) ₹ 750 crores$
›Reveal solutionSolution
$k = \frac{1}{1-MPC} = 2.5$ , so $\Delta Y = k \times \Delta I = 2.5 \times 300 = 750$ crores.

Step 1 — The multiplier formula

The investment multiplier links a change in investment to the eventual change in income:
$k = \frac{1}{1 - MPC} = \frac{1}{MPS}$
Step 2 — Compute the multiplier
$k = \frac{1}{1 - 0.6} = \frac{1}{0.4} = 2.5$
Step 3 — Apply it to the investment change
$\Delta Y = k \times \Delta I = 2.5 \times 300 = 750 \text{ crores}$
Why the other options are wrong

(A) ₹300 crores ignores the multiplier (assumes k = 1).

(B) ₹100 crores has no valid derivation. …
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CA Foundation 2025Set jan-20251 markMCQ
$Q. The investment multiplier is defined as the ratio of : (A) change in investment due to change in saving (B) change in demand due to change in investment (C) change in consumption due to change in investment (D) change in national income due to change in investment$
›Reveal solutionSolution
The investment multiplier is $k = \dfrac{\Delta Y}{\Delta I}$ — the ratio of the change in income to the change in investment.

Step 1 — Definition

When investment rises, the extra spending becomes someone's income, part of which is re-spent, and so on. The multiplier captures the total, magnified effect on national income:
$k = \frac{\Delta Y}{\Delta I} = \frac{1}{1 - MPC}$
Step 2 — Read the ratio correctly

Income ( $\Delta Y$ ) is on top, investment ( $\Delta I$ ) at the bottom. So the multiplier is 'change in national income due to change in investment'.

Step 3 — Why the other options are wrong

(A) links investment to saving — that is not the multiplier.

(B) 'change in demand due to change in investment' is loosely worded and not the standard definition. …
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CA Foundation 2025Set sep-20251 markMCQ
$Q. The maximum value of investment multiplier will be the infinity when the value of : (A) MPC is 1. (B) MPC is -1. (C) APC is 1. (D) MPS is -1.$
›Reveal solutionSolution
$k=1/(1-\text{MPC})$ is infinite when $1-\text{MPC}=0$ , i.e. MPC = 1.

Step 1 — The multiplier formula
$k = \frac{1}{1-\text{MPC}} = \frac{1}{\text{MPS}}$
The multiplier grows as MPC rises toward 1 (equivalently, as MPS falls toward 0).

Step 2 — When does it become infinite?

A fraction blows up to infinity only when its denominator approaches zero:
$1-\text{MPC}=0 \;\Rightarrow\; \text{MPC}=1 \;\Rightarrow\; \text{MPS}=0$
With MPC = 1 every additional rupee of income is re-spent, so successive rounds of spending never leak away and the multiplier is theoretically infinite.

Why the other options are wrong

(B) MPC = −1 and (D) MPS = −1 are economically impossible; MPC and MPS lie between 0 and 1. …
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CA Foundation 2025Set sep-20251 markMCQ
$Q. If national income increases from ₹ 500 crores to ₹ 2,500 crores due to an increase in investment of ₹ 200 crores, what will be the value of the Marginal Propensity to Consume (MPC) ? (A) 0.90 (B) 0.85 (C) 0.75 (D) 0.95$
›Reveal solutionSolution

$k=\Delta Y/\Delta I = 2000/200 = 10 = 1/(1-\text{MPC})$ ⇒ MPC = 0.90.

Step 1 — Find the multiplier
$k=\frac{\Delta Y}{\Delta I}=\frac{2{,}500-500}{200}=\frac{2{,}000}{200}=10$
Step 2 — Link the multiplier to MPC
$k=\frac{1}{1-\text{MPC}} \;\Rightarrow\; 10=\frac{1}{1-\text{MPC}}$
Step 3 — Solve for MPC
$1-\text{MPC}=\frac{1}{10}=0.1 \;\Rightarrow\; \text{MPC}=0.90$
Why the other options are wrong

MPC values of 0.85, 0.75 or 0.95 correspond to multipliers of about 6.7, 4 and 20 respectively — none of which equals the actual multiplier of 10 implied by the data. …
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←Previous questionQ56 — Total consumption expenditure by households under Keynesian Economics …→Next questionQ58 — (a) Complete the following table. Construct/Express the Consumption fu…

Q.Suppose for a hypothetical economy : C = 100 + 0·75Y (where C = Consumption and Y = Income); I₀ = 400 (I₀ = Autonomous Investment). Value of Investment Multiplier (K) would be ________. (Choose the correct alternative to fill in the blank) (A) 5 (B) 4 (C) 6 (D) 3

Concept understanding — The Investment Multiplier

The formula

How and why it works

Worked illustration

Key relationships

Step 1 — Find the multiplier

Step 2 — Relate the multiplier to MPC

Step 3 — Solve for MPC

Step 4 — Eliminate the others …

Step 1 — State the multiplier formula

Step 2 — See how k responds to MPC and MPS

Step 3 — Test each statement

Step 4 — Numerical check …

Step 1 — The multiplier formula

Step 2 — Compute the multiplier

Step 3 — Apply it to the investment change

Why the other options are wrong

Step 1 — Definition

Step 2 — Read the ratio correctly

Step 3 — Why the other options are wrong

Step 1 — The multiplier formula

Step 2 — When does it become infinite?

Why the other options are wrong

Step 1 — Find the multiplier

Step 2 — Link the multiplier to MPC

Step 3 — Solve for MPC

Why the other options are wrong

Q.Suppose for a hypothetical economy : C = 100 + 0·75Y (where C = Consumption and Y = Income); I₀ = 400 (I₀ = Autonomous Investment). Value of Investment Multiplier (K) would be ________. (Choose the correct alternative to fill in the blank) (A) 5 (B) 4 (C) 6 (D) 3

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