Question

What will happen to the income levels in the following situations? Explain:

(a) When MPC rises

(b) When inventory levels accumulate

(c ) When AD level increases due to change in government spending

Answer 1

(a) When MPC rises, income levels will increase because MPC is directly related to the multiplier in an economy. With the increase in induced consumption expenditure, income will increase by higher amount.

(b) When inventory levels accumulate, income levels will fall because producers will reduce the production.

(c ) When AD levels increase due to an increase in government spending, it will increase the flow of money in an economy and due to multiplier effects, the national income will increase multifold.