CUET UG Economics Booster Test 3 - Multiplier and Advanced Concepts -

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CUET UG Economics Booster Test 3 - Multiplier and Advanced Concepts

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Economics Booster Test 3 - Multiplier and Advanced Concepts

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QUESTION 1 OF 20

Which of the following statements are correct regarding the multiplier concept?
Statements:
1. It is the ratio of the increment in equilibrium output to the initial increment in autonomous expenditure.
2. It explains how a change in autonomous investment causes an exactly equal change in total income.
3. Its magnitude depends directly on the value of the Marginal Propensity to Consume (MPC).

Answer Review

1 Which of the following statements are correct regarding the multiplier concept?
Statements:
1. It is the ratio of the increment in equilibrium output to the initial increment in autonomous expenditure.
2. It explains how a change in autonomous investment causes an exactly equal change in total income.
3. Its magnitude depends directly on the value of the Marginal Propensity to Consume (MPC).

A 1 only

B 2 only

C 1 and 3 only

D 2 and 3 only

💡 Short Explanation

The investment multiplier measures the change in equilibrium income resulting from a change in autonomous expenditure. Its size depends on the Marginal Propensity to Consume (MPC). The multiplier causes a multiple, not an equal, change in income.

✅ Correct Answer Explanation

Evaluate each statement: Statement 1: Correct. The investment multiplier is defined as the ratio of the change in equilibrium income to the initial change in autonomous expenditure: k=ΔY/ΔI Statement 2: Incorrect. A change in autonomous investment does not produce an exactly equal change in total income. Instead, it generates a multiple change depending on the value of the multiplier. Statement 3: Correct. The multiplier depends directly on the Marginal Propensity to Consume (MPC) and is given by: k=1/1-c where c = MPC. A higher MPC results in a larger multiplier. Therefore, Statements 1 and 3 are correct. Hence, Option C is the correct answer.

❓ Why Other Options Are Incorrect

Option A: Incorrect because Statement 3 is also correct.
Option B: Incorrect because Statement 2 is false.
Option D: Incorrect because Statement 2 is false.

🎯 Strategy

Statement Verification

Application:

Evaluate each statement using the definition and formula of the investment multiplier.

Final Logic:

The multiplier is the ratio of the change in income to autonomous expenditure and depends on the MPC. It produces a multiple, not an equal, increase in income. Therefore, Option C is correct.

🧠 Memory Trick

"Multiplier = Multiple Increase, Not Equal Increase."

📚 Chapter: Determination of Income and Employment

2 Assertion (A): The working process of the multiplier assumes that producers continuously increase output to clear the excess demand in each round.
Reason (R): Consumers spend a part of their additional income on consumption items, which actively creates further excess demand in the subsequent rounds.

A Both true, R explains A

B Both true, R does not explain A

C A true, R false

D Both false

💡 Short Explanation

Every increase in income generates additional consumption expenditure, creating fresh excess demand. Producers respond by increasing output, giving rise to successive rounds of the multiplier.

✅ Correct Answer Explanation

Initially: Autonomous investment increases. Firms expand production. Income rises. Since households consume a fraction (MPC) of this additional income: Consumption increases. Fresh Aggregate Demand is created. Producers again increase production. Thus, Assertion is true. Reason is true. Reason correctly explains the Assertion. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because the Reason directly explains the Assertion.
Option C) Incorrect because the Reason is true.
Option D) Incorrect because both statements are true.

🎯 Strategy

Used

Assertion–Reason

Application: Link induced consumption with successive rounds of production.

Final Logic: Additional consumption creates further excess demand, explaining why producers continue increasing output.

🧠 Memory Trick

"Income → Spending → Demand → Production."

📚 Chapter: Determination of Income and Employment

3 Arrange the following multiplier rounds in chronological order of their impact on Aggregate Demand, given an initial autonomous increment of 10 and an MPC of 0.8.
Statements:
1. (0.8)^3, 10
2. 10
3. (0.8)^2, 10
4. (0.8)×10

A 1, 2, 3, 4

B 4, 3, 2, 1

C 2, 3, 4, 1

D 2, 4, 3, 1

💡 Short Explanation

The multiplier generates a geometric progression where each successive round equals MPC × previous round.

✅ Correct Answer Explanation

The sequence is: Round 1 10 Round 2 0.8×10 Round 3 (0.8)^2, 10 Round 4 (0.8)^3, 10 Thus, the correct chronological order is: 2 → 4 → 3 → 1 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because it starts with the final round.
Option B) Incorrect because it reverses the sequence.
Option C) Incorrect because the second and third rounds are interchanged.

🎯 Strategy

Used

Arrange in Order

Application: Follow the geometric progression generated by the multiplier.

Final Logic: Initial expenditure is followed by successively smaller MPC multiples.

🧠 Memory Trick

"10 → 8 → 6.4 → 5.12..."

📚 Chapter: Determination of Income and Employment

4 The mathematical convergence of the multiplier process relies heavily on the fact that:

A Consumers save their entire income in the final round.

B The MPC lies between 0 and 1, causing dwindling values in successive rounds.

C Autonomous investment actively decreases in each successive round.

D The MPC is inherently greater than 1.

💡 Short Explanation

The multiplier process converges because households spend only a fraction (MPC) of each additional unit of income, making every successive round smaller than the previous one.

✅ Correct Answer Explanation

The multiplier generates an infinite geometric series: ΔI+cΔI+c^2ΔI+c^3ΔI+⋯ This series converges only when: 0<c<1 Since MPC is less than 1, each successive round is smaller, allowing the series to approach a finite value. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because consumers never save their entire income during the multiplier process.
Option C) Incorrect because autonomous investment remains constant after the initial increase.
Option D) Incorrect because MPC greater than 1 is not economically possible and would make the series diverge.

🎯 Strategy

Used

Concept Application

Application: Recall the condition for convergence of an infinite geometric progression.

Final Logic: Since 0<MPC<1, the multiplier process converges. Therefore, Option B is correct.

🧠 Memory Trick

"MPC Less Than One → Multiplier Gets Done."

📚 Chapter: Determination of Income and Employment

5 Match the value of the Marginal Propensity to Consume (MPC) with the corresponding investment multiplier (k).

List I	List II
1. MPC = 0.5	a. k = 4
2. MPC = 0.8	b. k = 2
3. MPC = 0	c. k = 1
4. MPC = 0.75	d. k = 5

A 1-b, 2-d, 3-c, 4-a

B 1-a, 2-b, 3-c, 4-d

C 1-c, 2-a, 3-d, 4-b

D 1-d, 2-c, 3-b, 4-a

💡 Short Explanation

Use the multiplier formula: k=1/1-c to calculate each multiplier.

✅ Correct Answer Explanation

Calculations: MPC = 0.5 k=1/1-0.5=2 → b MPC = 0.8 k=1/0.2=5 → d MPC = 0 k=1/1=1 → c MPC = 0.75 k=1/0.25=4 → a Therefore, 1-b, 2-d, 3-c, 4-a Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because the multipliers are mismatched.
Option C) Incorrect because MPC = 0.5 does not produce k = 1.
Option D) Incorrect because multiple pairings are incorrect.

🎯 Strategy

Used

Formula Application

Application: Compute k=1/1-c for each MPC.

Final Logic: Only Option A correctly matches every value.

🧠 Memory Trick

"Higher MPC → Higher Multiplier."

📚 Chapter: Determination of Income and Employment

6 Since the absolute size of the multiplier depends on the value of c (MPC), as c becomes ________ the multiplier logically ________.

A Smaller; increases

B Larger; decreases

C Negative; becomes infinite

D Larger; increases

💡 Short Explanation

The multiplier is directly related to MPC.

✅ Correct Answer Explanation

The multiplier formula is: k=1/1-c As MPC (c) increases: The denominator (1, c)becomes smaller. The multiplier becomes larger. Example: MPC = 0.5 → k = 2 MPC = 0.8 → k = 5 MPC = 0.9 → k = 10 Thus, a larger MPC always produces a larger multiplier. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because a smaller MPC reduces the multiplier.
Option B) Incorrect because the relationship is the opposite.
Option C) Incorrect because MPC cannot be negative in this context, and an infinite multiplier is not implied.

🎯 Strategy

Used

Concept Application

Application: Apply the multiplier formula to understand the relationship between MPC and the multiplier.

Final Logic: Higher MPC → Larger multiplier. Therefore, Option D is correct.

🧠 Memory Trick

"Higher MPC, Higher Multiplier."

📚 Chapter: Determination of Income and Employment

7 In a given economy, if the consumption function is C=100+0.8Yand autonomous investment (I) suddenly changes from 10 to 20, the initial increase in autonomous expenditure is:

A 100

B 50

C 10

D 20

💡 Short Explanation

The initial increase in autonomous expenditure is simply the change in autonomous investment.

✅ Correct Answer Explanation

Initially, I=10 Later, I=20 Therefore, ΔI=20-10=10 Since autonomous consumption remains unchanged, the increase in autonomous expenditure is ₹10. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because ₹100 is the autonomous consumption component, not the increase in investment.
Option B) Incorrect because ₹50 is unrelated to the change in investment.
Option D) Incorrect because ₹20 is the new investment level, not the increase.

🎯 Strategy

Used

Numerical Application

Application: Calculate the difference between the new and old autonomous investment.

Final Logic: Initial increase = New Investment − Old Investment = ₹10. Therefore, Option C is correct.

🧠 Memory Trick

"Change Means New Minus Old."

📚 Chapter: Determination of Income and Employment

8 Based on the parameters of the previous question (where initial autonomous investment increases by 10 and C=100+0.8Y), what will be the total effect on the equilibrium income level?

A 10

B 20

C 40

D 50

💡 Short Explanation

The total increase in equilibrium income equals the multiplier multiplied by the increase in autonomous investment.

✅ Correct Answer Explanation

Given: MPC = 0.8 Initial increase in investment = ₹10 Multiplier: k=1/1-0.8=5 Therefore, ΔY=k×ΔI=5×10=50 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because it represents only the initial investment increase.
Option B) Incorrect because it underestimates the multiplier effect.
Option C) Incorrect because the multiplier is 5, not 4.

🎯 Strategy

Used

Formula Application

Application:

Use
k=1/1-c
then calculate
ΔY=k×ΔI.

Final Logic: The total increase in equilibrium income is ₹50. Therefore, Option D is correct.

🧠 Memory Trick

"Multiplier × Investment = Income Increase."

📚 Chapter: Determination of Income and Employment

9 Assertion (A): An increase in autonomous investment shifts the AD curve vertically upwards by the exact amount of the investment increase.
Reason (R): Autonomous investment depends directly and proportionately on the level of income.

A Both true, R explains A

B A true, R false

C A false, R true

D Both false

💡 Short Explanation

Autonomous investment causes a parallel upward shift in the Aggregate Demand curve because it is independent of income.

✅ Correct Answer Explanation

The Assertion is True because an increase in autonomous investment raises Aggregate Demand by the same amount at every income level, shifting the AD curve vertically upward. The Reason is False because autonomous investment is exogenous and does not depend on the current level of income. It is represented as: I=I Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the Reason is false.
Option C) Incorrect because the Assertion is true.
Option D) Incorrect because the Assertion is true.

🎯 Strategy

Used

Assertion–Reason Analysis

Application: Distinguish between autonomous (income-independent) and induced (income-dependent) variables.

Final Logic: Autonomous investment shifts the AD curve upward but is not determined by income. Therefore, Option B is correct.

🧠 Memory Trick

"Autonomous = Independent of Income."

📚 Chapter: Determination of Income and Employment

10 Why does aggregate output increase by an amount larger than the size of the initial increment in autonomous expenditure?

A Due to the induced consumption expenditure occurring in successive rounds.

B Because the Aggregate Supply curve aggressively shifts to the right.

C Due to a continuous decline in the Marginal Propensity to Save.

D Because of a calculated decrease in government taxes.

💡 Short Explanation

The multiplier process works because each increase in income induces further consumption, creating additional rounds of spending and output.

✅ Correct Answer Explanation

An increase in autonomous expenditure first raises income. Households then spend a fraction (MPC) of this additional income. This creates: additional Aggregate Demand, further increases in production, more income, and repeated rounds of induced consumption. Consequently, the final increase in equilibrium output exceeds the initial increase in autonomous expenditure. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because the multiplier mechanism is driven by Aggregate Demand, not by a rightward shift in Aggregate Supply.
Option C) Incorrect because a decline in MPS alone is not the direct explanation; the key mechanism is induced consumption.
Option D) Incorrect because the question refers generally to autonomous expenditure, not specifically to tax changes.

🎯 Strategy

Used

Concept Application

Application: Recall the working mechanism of the investment multiplier.

Final Logic: Successive rounds of induced consumption generate a multiplied increase in output. Therefore, Option A is correct.

🧠 Memory Trick

"Income → Consumption → Income Again."

📚 Chapter: Determination of Income and Employment**

11 The paradox of thrift critically illustrates that if the ________ of the economy increases, the total value of savings will practically not increase.

A Marginal Propensity to Consume (MPC)

B Marginal Propensity to Save (MPS)

C Baseline autonomous investment

D Total Aggregate Demand

💡 Short Explanation

The Paradox of Thrift states that when everyone attempts to save more (higher MPS), Aggregate Demand falls, reducing National Income. Consequently, total savings may remain unchanged or even decrease.

✅ Correct Answer Explanation

When households increase their Marginal Propensity to Save (MPS): Consumption expenditure decreases. Aggregate Demand falls. Firms reduce production. National Income declines. The fall in income offsets the increase in the saving ratio. Therefore, despite a higher MPS, total savings do not increase significantly. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because a higher MPC generally increases Aggregate Demand.
Option C) Incorrect because autonomous investment is unrelated to the paradox itself.
Option D) Incorrect because Aggregate Demand decreases rather than increases.

🎯 Strategy

Used

Concept Identification

Application: Recall the central idea of the Keynesian Paradox of Thrift.

Final Logic: Higher MPS → Lower Income → Savings remain unchanged or fall. Therefore, Option B is correct.

🧠 Memory Trick

"More Saving by All = Same Saving Overall."

📚 Chapter: Determination of Income and Employment

12 Which of the following statements accurately describes the outcome on savings when people suddenly become more thrifty?

A The initial excess supply leads to higher production and greater overall savings.

B The increase in MPS causes equilibrium income to rise, boosting absolute savings.

C As Aggregate Demand decreases, income falls, ensuring total savings either decline or remain precisely unchanged.

D The AD curve smoothly swings upwards, heavily stimulating both investment and savings.

💡 Short Explanation

Higher thrift reduces consumption, which lowers Aggregate Demand and equilibrium income. This prevents total savings from increasing.

✅ Correct Answer Explanation

When everyone saves a larger proportion of income: Consumption decreases. Aggregate Demand shifts downward. Firms reduce output. Income declines through the multiplier process. The fall in income offsets the higher saving ratio. Thus, aggregate savings remain unchanged or decline. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because excess supply causes firms to reduce production.
Option B) Incorrect because equilibrium income falls rather than rises.
Option D) Incorrect because the AD curve swings downward, not upward.

🎯 Strategy

Used

Concept Application

Application: Apply the multiplier process after an increase in thrift.

Final Logic: Lower consumption reduces income, preventing total savings from increasing. Therefore, Option C is correct.

🧠 Memory Trick

"Higher Thrift → Lower Income → Same Savings."

📚 Chapter: Determination of Income and Employment

13 An autonomous reduction in aggregate consumption expenditure, triggered by a sudden drop in MPC from 0.8 to 0.5 at an initial income of 250, results in an initial excess supply equal to:

A The original total income (250).

B The value of the new autonomous investment.

C The numerical difference in MPC multiplied by the initial equilibrium income (75).

D The exact new multiplier value.

💡 Short Explanation

The fall in MPC reduces planned consumption by: ΔC=ΔMPC×Y creating an initial excess supply.

✅ Correct Answer Explanation

Initial MPC = 0.8 New MPC = 0.5 Difference: 0.8-0.5=0.3 Initial income: Y=250 Reduction in consumption: 0.3×250=75 Thus, the initial excess supply equals ₹75. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because ₹250 is total income, not excess supply.
Option B) Incorrect because autonomous investment does not determine this change.
Option D) Incorrect because the multiplier is unrelated to the initial excess supply calculation.

🎯 Strategy

Used

Numerical Application

Application: Calculate the reduction in consumption using the change in MPC.

Final Logic:

(0.8-0.5)×250=75
Therefore, Option C is correct.

🧠 Memory Trick

"Consumption Loss = Change in MPC × Income."

📚 Chapter: Determination of Income and Employment

14 Arrange the logical sequence of macroeconomic events resulting from a decrease in the Marginal Propensity to Consume (MPC).
Statements:
1. The AD line swings downward.
2. Equilibrium income ultimately falls.
3. Excess supply emerges in the goods market.
4. Consumers rapidly become more thrifty due to external factors.

A 1, 2, 3, 4

B 4, 1, 3, 2

C 4, 3, 1, 2

D 1, 4, 3, 2

💡 Short Explanation

When people become more thrifty, MPC decreases. This causes the Aggregate Demand (AD) curve to swing downward, creating excess supply and ultimately reducing equilibrium income.

✅ Correct Answer Explanation

The correct sequence is: Step 1: Consumers become more thrifty, reducing MPC. Step 2: The AD curve swings downward because its slope decreases. Step 3: Planned Aggregate Demand becomes less than planned output, creating excess supply. Step 4: Firms cut production, causing equilibrium income to fall. Thus, the correct order is: 4 → 1 → 3 → 2 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because thrift must occur before the AD curve changes.
Option C) Incorrect because excess supply arises after the AD curve swings downward.
Option D) Incorrect because consumers become more thrifty before the AD curve changes.

🎯 Strategy

Used

Arrange in Order

Application: Follow the Keynesian chain from behavioural change to equilibrium adjustment.

Final Logic: Thrift → Lower MPC → AD swings downward → Excess supply → Lower income.

🧠 Memory Trick

"Thrift → AD Falls → Excess Supply → Income Falls."

📚 Chapter: Determination of Income and Employment

15 Assertion (A): The equilibrium attained at the point of equality of Y and AD by itself does not signify full employment of resources.
Reason (R): Equilibrium only strictly means that the level of income will not change if left to itself, even if there is unemployment.

A Both true, R explains A

B Both true, R does not explain A

C A true, R false

D Both false

💡 Short Explanation

Keynesian equilibrium means output is stable, but it may occur below the full-employment level if Aggregate Demand is insufficient.

✅ Correct Answer Explanation

The Assertion is True because equilibrium simply means: Y=AD It does not guarantee full employment. The Reason is also True because Keynesian equilibrium can exist with unemployment if Aggregate Demand is too low. The Reason directly explains why equilibrium does not necessarily imply full employment. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because the Reason directly explains the Assertion.
Option C) Incorrect because the Reason is true.
Option D) Incorrect because both statements are correct.

🎯 Strategy

Used

Assertion–Reason Analysis

Application: Distinguish equilibrium from full employment.

Final Logic: Stable income does not necessarily mean full employment. Therefore, Option A is correct.

🧠 Memory Trick

"Equilibrium = Stable Output, Not Full Employment."

📚 Chapter: Determination of Income and Employment

16 Match the macroeconomic scenario strictly with the condition of factor utilisation.

List I	List II
1. Output > Full employment output	a. Deficient demand
2. Output < Full employment output	b. Diminishing returns do not strictly apply
3. Output = Full employment output	c. All factors fully employed
4. Unused resources are present	d. Excess demand

A 1-a, 2-b, 3-c, 4-d

B 1-b, 2-c, 3-d, 4-a

C 1-c, 2-d, 3-a, 4-b

D 1-d, 2-a, 3-c, 4-b

💡 Short Explanation

Different output levels correspond to different macroeconomic situations regarding demand and resource utilisation.

✅ Correct Answer Explanation

The correct matching is: 1. Output > Full employment output → d. Excess demand 2. Output < Full employment output → a. Deficient demand 3. Output = Full employment output → c. All factors fully employed 4. Unused resources are present → b. Diminishing returns do not strictly apply Thus, the correct sequence is: 1-d, 2-a, 3-c, 4-b Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because output above full employment corresponds to excess demand, not deficient demand.
Option B) Incorrect because output below full employment indicates deficient demand.
Option C) Incorrect because the first two pairings are incorrect.

🎯 Strategy

Used

Concept Matching

Application: Match each output situation with its appropriate macroeconomic condition.

Final Logic: Only Option D correctly matches all four scenarios.

🧠 Memory Trick

"Below Full Employment → Deficient Demand; Above Full Employment → Excess Demand."

📚 Chapter: Determination of Income and Employment

17 If the equilibrium output is structurally less than the full employment level of output due to deficient demand, what is the anticipated long-run consequence according to the text?

A It leads directly to a decline in prices.

B It triggers a rapid rise in general prices.

C It permanently increases the Marginal Propensity to Save.

D It drastically shifts the Aggregate Supply curve upwards.

💡 Short Explanation

Deficient demand means Aggregate Demand is insufficient to achieve full employment. In the long run, persistent deficient demand creates downward pressure on prices.

✅ Correct Answer Explanation

When equilibrium output remains below the full-employment level: Aggregate Demand is insufficient. Firms cannot sell all their output. Excess capacity and unemployment persist. Competitive pressure eventually causes prices to fall in the long run. Thus, deficient demand is associated with a decline in the general price level over time. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because rising prices are associated with excess demand, not deficient demand.
Option C) Incorrect because deficient demand does not permanently increase the Marginal Propensity to Save.
Option D) Incorrect because deficient demand does not by itself shift the Aggregate Supply curve upward.

🎯 Strategy

Used

Concept Application

Application: Relate deficient demand to long-run macroeconomic outcomes.

Final Logic: Persistent deficient demand creates downward pressure on prices. Therefore, Option A is correct.

🧠 Memory Trick

"Low Demand → Low Prices."

📚 Chapter: Determination of Income and Employment

18 Excess demand occurs when the Aggregate Demand is precisely ________ the level of output produced at the full employment level.

A Identically equal to

B Significantly less than

C Negatively correlated with

D More than

💡 Short Explanation

Excess demand arises when Aggregate Demand exceeds the economy's full-employment output.

✅ Correct Answer Explanation

At the full-employment level: The economy is already utilizing all available productive resources. If Aggregate Demand becomes greater than this level of output, firms cannot sustainably increase production. This results in excess demand and inflationary pressure. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because equality indicates equilibrium, not excess demand.
Option B) Incorrect because lower demand results in deficient demand.
Option C) Incorrect because this does not describe the relationship defining excess demand.

🎯 Strategy

Used

Definition Identification

Application: Recall the NCERT definition of excess demand.

Final Logic: Excess demand exists when Aggregate Demand exceeds full-employment output. Therefore, Option D is correct.

🧠 Memory Trick

"Demand More Than Capacity = Excess Demand."

📚 Chapter: Determination of Income and Employment

📄 Passage

"When, at a particular price level, Aggregate Demand for final goods equals Aggregate Supply of final goods, the final goods (product) market reaches equilibrium. Under such circumstances, aggregate output is determined solely by the level of Aggregate Demand. This is known as the Effective Demand Principle. An increase (decrease) in autonomous spending causes aggregate output to increase (decrease) by a larger amount through the multiplier process."

According to the passage, the Effective Demand Principle dictates that under fixed prices, an increase in autonomous spending will conclusively cause the aggregate output to:

A Decrease progressively by a larger amount.

B Increase by a larger amount exclusively through the multiplier process.

C Remain completely unchanged due to price rigidity.

D Increase by an exact equal amount to the autonomous spending.

💡 Short Explanation

An increase in autonomous spending triggers successive rounds of induced consumption, causing output to rise by more than the initial increase.

✅ Correct Answer Explanation

The passage states that: Aggregate output is determined by Aggregate Demand. Autonomous spending shifts Aggregate Demand upward. The multiplier process generates repeated rounds of expenditure. Therefore, the increase in output exceeds the original increase in autonomous spending. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because output increases rather than decreases.
Option C) Incorrect because output changes even when prices remain fixed.
Option D) Incorrect because the multiplier makes the increase larger than the initial spending.

🎯 Strategy

Used

Passage-Based Concept

Application: Identify the effect of autonomous spending described in the passage.

Final Logic: The multiplier causes output to increase by more than the initial spending. Therefore, Option B is correct.

🧠 Memory Trick

"Autonomous Spending → Multiplied Output."

📚 Chapter: Determination of Income and Employment

📄 Passage

According to the Keynesian conclusion highlighted in the passage, if the economy experiences a sharp decrease in autonomous spending, what technically happens to aggregate output?

A It initially increases slightly before stabilizing.

B It remains totally fixed due to constant prices.

C It decreases by a notably larger amount due to the multiplier process.

D It forcefully adjusts the price level immediately.

💡 Short Explanation

A decrease in autonomous spending lowers Aggregate Demand, and the multiplier amplifies this decline, causing equilibrium output to fall by more than the initial reduction.

✅ Correct Answer Explanation

According to the Effective Demand Principle: A fall in autonomous spending shifts the Aggregate Demand curve downward. Firms reduce production. Lower income reduces consumption further. The multiplier process spreads the decline throughout the economy. Therefore, aggregate output decreases by a larger amount than the original fall in autonomous spending. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because output does not initially increase.
Option B) Incorrect because fixed prices do not prevent output from changing.
Option D) Incorrect because the model assumes prices remain fixed during the analysis.

🎯 Strategy

Used

Passage-Based Application

Application: Apply the multiplier process to a decrease in autonomous spending.

Final Logic: Lower autonomous spending leads to a multiplied decrease in equilibrium output. Therefore, Option C is correct.

🧠 Memory Trick

"Less Spending → Multiplied Fall in Income."

📚 Chapter: Determination of Income and Employment

CUET UG Economics Booster Test 3 - Multiplier and Advanced Concepts

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