PRC-3 · Chapter 15 · Question 40 of 44
In a closed economy with no government, actual output is Rs. 20 million while full-employment potential is Rs. 25 million. If the Marginal Propensity to Consume (MPC) is 0.8, what size of new investment is needed to close the gap?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Rs. 1 million
Explanation
The gap is 5 million. The multiplier (K) is 1 / (1 - 0.8) = 5. To generate 5 million in final output, the initial investment must be 1 million (1m x 5 = 5m).
More Multiplier and Accelerator MCQs
- Q42The 'Accelerator Theory' differs from the Multiplier by focusing on capital investment behavior. It explicitly states that:
- Q43If the government decides to aggressively increase direct income taxes on citizens, what is the mathematical effect on the value of the…
- Q44During which specific phase of the business cycle does the economy experience a steady, optimistic rise in output, incomes, and business…
- Q1The government injects Rs. 100 million into building new roads. Because the construction workers spend their new wages at local shops, and…
- Q2In macroeconomic theory, while the Multiplier explains how Investment drives Consumption, the 'Accelerator' principle explains how: