CA Foundation P4 · Chapter 5 · Question 11 of 15
In a simple Keynesian model with lump-sum taxes, if government expenditure and taxes are both increased by Rs. 100 crore, national income will increase by:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Rs. 100 crore, since the balanced budget multiplier is one
Explanation
The government expenditure multiplier is 1/(1 - MPC) and the lump-sum tax multiplier is -MPC/(1 - MPC). Their sum is (1 - MPC)/(1 - MPC) = 1. So equal increases in G and T raise income by the same amount: Rs. 100 crore. For example, with MPC = 0.8: 100 x 5 - 100 x 4 = 100.
More Determination of National Income MCQs
- Q13In the two-sector Keynesian model, equilibrium income is attained where:
- Q14An inflationary gap exists when:
- Q15Disposable personal income is equal to:
- Q1Gross National Product (GNP) is equal to:
- Q2Given: GDP at market prices = Rs. 5,000 crore; depreciation = Rs. 400 crore; net factor income from abroad = -Rs. 100 crore; net indirect…