TutorOn by Sanath Withanage

Question:

[Table Data] Year 1: C=800, Y=1000. Year 2: C=960, Y=1200. An increase in net exports lifted national economy by Rs. 300 million in year 3. What was the increase in net exports?
(1) Rs. 300m
(2) Rs. 160m
(3) Rs. 100m
(4) Rs. 80m
(5) Rs. 60m

Correct Answer:

(5)

Answer Explanation:

Step 1: Calculate MPC. $Delta C = 960 – 800 = 160$. $Delta Y = 1200 – 1000 = 200$. $MPC = 160 / 200 = 0.8$. Step 2: Calculate the Multiplier ($k$). $k = 1 / (1 – MPC) = 1 / 0.2 = 5$. Step 3: Use the multiplier formula $Delta Y = k times Delta NX$. We know $Delta Y = 300$. So, $300 = 5 times Delta NX$. Solving for $Delta NX$, we get $300 / 5 = 60$.

Topic: Multiplier Effect Year: 2019