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Assume that in an economy increased consumption is equal to increased saving, how many times will the national income increase in such an economy with an increase in investment?
  • a)
    2 times
  • b)
    3 times
  • c)
    4 times
  • d)
    1 times
Correct answer is option 'A'. Can you explain this answer?
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Assume that in an economy increased consumption is equal to increased ...
Increased consumption equal to increased saving

In an economy where increased consumption is equal to increased saving, it implies that any additional income earned by individuals or households is split between consumption and saving in equal proportions. This means that when there is an increase in investment, it will lead to a multiplier effect on the national income. The multiplier effect refers to the phenomenon where an initial increase in investment leads to a larger overall increase in national income.

Explanation:

1. Consumption and saving relationship:
- In a typical economy, individuals and households earn income through various sources such as wages, salaries, and profits.
- They allocate this income between consumption and saving based on their preferences and needs.
- Consumption refers to the spending on goods and services, while saving refers to the portion of income that is not consumed and is set aside for future use.

2. Increased consumption equals increased saving:
- In the given scenario, it is assumed that any increase in consumption is matched by an equal increase in saving.
- This implies that if individuals decide to consume more out of their additional income, they will also save an equal amount.
- For example, if an individual earns an extra $100, they will spend $50 on consumption and save the remaining $50.

3. Multiplier effect on national income:
- When there is an increase in investment, it leads to an injection of additional spending into the economy.
- This additional spending creates a ripple effect as it increases the income of those who receive it.
- The recipients of the increased income then divide it between consumption and saving, following the assumption that increased consumption is equal to increased saving.
- The portion allocated to consumption is spent, leading to further increases in the income of other individuals or businesses.
- This cycle continues, with each round of spending and income generation creating a multiplier effect on the national income.

4. Conclusion:
- Given that increased consumption is equal to increased saving, an increase in investment will result in a multiplier effect on the national income.
- The multiplier effect leads to a larger overall increase in national income, which is why the correct answer is option 'A' - 2 times.
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Assume that in an economy increased consumption is equal to increased saving, how many times will the national income increase in such an economy with an increase in investment?a)2 timesb)3 timesc)4 timesd)1 timesCorrect answer is option 'A'. Can you explain this answer?
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