PRC-3 · Chapter 15 · Question 30 of 44
In a closed economy, the full employment output is Rs. 25 million, but actual output is only Rs. 20 million. The Marginal Propensity to Consume (MPC) is 0.8. What size of initial investment is needed to close this Rs. 5 million gap?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Rs. 1 million
Explanation
With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. To achieve a final growth of 5 million, the required initial injection is 5m / 5 = Rs. 1 million.
More Multiplier and Accelerator MCQs
- Q32The 'Accelerator Theory' differs from the Multiplier by focusing on investment. It states that:
- Q33Economist Paul Samuelson argued that the recurring, wave-like fluctuations of the business cycle are not random, but are actively driven…
- Q34If a country has a very high Marginal Propensity to Import (citizens spend most new money on foreign goods), how will this specific…
- Q35Certain economic statistics, like the number of new building permits issued, change direction before the broader economy does. These are…
- Q36The topmost point of a business cycle, characterized by factories operating at maximum capacity, practically zero unemployment, and severe…