All questions of National Income Determination for B Com Exam

Understanding the Multiplier Effect
The multiplier effect refers to the proportionate increase in final income that results from an injection of spending. In an open economy, various factors can influence the value of the multiplier.
Role of Exports
Exports are a crucial component of aggregate demand. When exports increase, they add to the overall spending in the economy, leading to higher production, income, and employment. Conversely, a decrease in exports has a significant negative impact.
Impact of Decreased Exports
- Reduced Aggregate Demand: A decrease in exports means less demand for domestically produced goods and services. This reduction lowers overall economic activity.
- Lower Income and Employment: With decreased demand, businesses may reduce production, leading to lower income levels and potential job losses, which further dampens consumer spending.
- Weaker Multiplier Effect: As income and spending decline, the multiplier effect weakens. The initial decrease in exports leads to a smaller ripple effect throughout the economy, resulting in diminished overall economic growth.
Comparison with Other Factors
- Increased Government Spending: This tends to increase the multiplier as it injects money directly into the economy.
- Increased Savings: While this can reduce consumption in the short term, it may not directly reduce the multiplier effect as savings can lead to investment.
- Decreased Taxes: This generally increases disposable income, enhancing consumer spending and potentially increasing the multiplier.
Conclusion
Thus, among the options provided, decreased exports are the most effective way to reduce the value of the multiplier due to their direct impact on aggregate demand and overall economic activity.

The multiplier works not only in terms of money income but also in terms of real output, as increased demand for goods leads to an increase in their production, contributing to higher real output.

The Marginal Efficiency of Capital (MEC) represents the highest rate of return expected from an additional unit of capital asset over its cost.

Explanation:

What is Marginal Efficiency of Capital (MEC)?

- The Marginal Efficiency of Capital (MEC) is a concept in economics that refers to the expected rate of return on an investment in an additional unit of capital asset. It represents the additional net revenue that an additional unit of capital is expected to generate over its cost.

Significance of MEC:

- MEC is an important concept in investment decision-making as it helps businesses and investors determine the profitability of investing in additional capital assets. By comparing the MEC with the cost of capital, businesses can make informed decisions about whether to invest in new capital projects.

Calculation of MEC:

- The MEC is calculated by dividing the expected increase in net revenue from an additional unit of capital by the cost of acquiring that unit of capital. It represents the incremental rate of return on investment and helps businesses assess the potential profitability of investing in additional capital assets.

Importance of MEC:

- The MEC helps businesses and investors evaluate the potential returns on investment and make decisions about allocating resources to different capital projects. By comparing the MEC of different investment opportunities, businesses can prioritize investments that offer the highest returns and maximize profitability.

In conclusion, the Marginal Efficiency of Capital (MEC) represents the highest rate of return expected from an additional unit of capital asset over its cost, making it a crucial concept in investment decision-making.

Understanding Marginal Efficiency of Investment (MEI)
The Marginal Efficiency of Investment (MEI) is a crucial concept in economics that reflects the expected profitability of additional investment in capital. When total purchasing increases, the MEI curve can be significantly impacted.
Impact of Increased Total Purchasing
- Increased Demand for Goods: An increase in total purchasing typically indicates a rise in demand for goods and services. This heightened demand can lead businesses to invest more in capital to meet the needs of consumers.
- Shifting the MEI Curve: When total purchasing increases, the MEI curve shifts to the left. This shift signifies that for any given level of investment, the expected return decreases. This is primarily because:
- Higher Costs of Investment: As more firms invest to cater to increased demand, the costs of production inputs may rise, leading to lower marginal returns on additional investments.
- Diminishing Returns: The principle of diminishing returns suggests that as more capital is employed, the additional output generated from each unit of capital tends to decrease, thus lowering the MEI.
Conclusion
In summary, an increase in total purchasing affects the MEI by shifting the curve to the left, indicating reduced profitability for additional investments. This aligns with the economic principle that increased demand can lead to higher costs and lower marginal returns, making option 'D' correct. Understanding this relationship helps in making informed investment decisions in a dynamic market.

Induced investment is profit or income motivated and is influenced by factors like changes in prices, wages, interest rates, and demand. Changes in the market interest rate can affect the cost of borrowing and the potential return on investment, thus influencing induced investment.

Financial investment refers to the purchase of existing financial assets like shares and securities, while real investment involves adding to the capital equipment by investing in new plant and equipment, construction of public works, inventories, etc. Real investment has a direct impact on increasing income and production.

The marginal propensity to consume (MPC) refers to the increase in consumption that occurs due to a change in income.

The two limiting cases of the multiplier value are when the marginal propensity to consume is equal to one (resulting in an infinite multiplier) and when it is equal to zero (resulting in a multiplier of one).

When the marginal propensity to consume increases, the value of the multiplier also increases, leading to a larger impact on total income.

The MEC is based on a given supply price for capital assets, while the MEI is based on induced changes in this price due to changes in demand and other factors.

The MEI shows the rate of return expected from a given investment on a capital asset after covering all costs except the rate of interest. It has an inverse relationship with the rate of interest. When the rate of interest is high, investment demand is lower, and vice versa.

The MEC determines the optimum capital stock in an economy at each level of interest rate. It indicates whether investing in new capital assets is worthwhile by comparing the prospective yield with the supply price.

The MEC and the rate of interest have an inverse relationship. When the rate of interest is high, the MEC is lower, and vice versa. This relationship influences investment decisions.

The size of the multiplier can be represented by the formula: Size of multiplier or k = 1/1 - MPS.

Excess capacity in consumer goods industries allows for an increase in production to meet rising demand, thereby increasing the value of the multiplier effect.

The key concept of the multiplier theory is that an initial increase in investment leads to a larger increase in total income through successive rounds of consumption and spending.

As the existing capital stock increases, the MEC falls due to the operation of the law of diminishing returns. The marginal physical productivity of capital and marginal revenue decline, leading to a decrease in the MEC.

Autonomous investment is independent of the level of income and is influenced by exogenous factors like innovations, population growth, government policies, etc. It is not influenced by changes in demand.

The type of multiplier associated with an increase in total income due to an initial increase in investment is the Income Multiplier.

The concept of multiplier theory was first developed by F.A. Kahn in the early 1930s. Keynes later refined this concept in his economic theory.