Which one of the following combinations may not render the investment multiplier inapplicable?
Closed economy, unemployment in the economy, constant marginal propensity to consume.
Concept: The investment multiplier measures how an initial rise in investment produces a larger final rise in income, but it works fully only under ideal conditions; leakages (like imports, taxes and savings) and rigidities weaken or 'render it inapplicable'. The question asks for the combination that does NOT weaken it - that is, the conditions under which the multiplier does work.
Net imports, undistributed profits, taxation, savings, debt cancellation, excess stocks, price inflation and a strong liquidity preference are all leakages or dampeners that reduce the multiplier's effect, so combinations built from them do render the multiplier weak or inapplicable. For example, if households save or import much of the extra income, less of it is re-spent and the multiplier chain quickly dies out.
A closed economy (no import leakage), the existence of unemployment (so extra demand raises output rather than only prices), and a constant marginal propensity to consume (a stable, well-defined multiplier value) are exactly the assumptions under which the simple multiplier holds fully.
Option check: The three options containing imports, taxation, savings, inflation or liquidity preference each carry a leakage that blocks the multiplier, so they are eliminated; only the closed-economy, unemployment, constant-MPC combination is leakage-free.
Hence the combination that does not render the investment multiplier inapplicable is a closed economy, unemployment in the economy, and a constant marginal propensity to consume.
Similar Questions
If the rate of return on investment opportunity is likely to be 15 percent, the opportunity cost of capital is 10 percent, the earnings per share is ₹ 10 and if the pay-out ratio is 40 percent, the price of share according to Walter Model will be :
If the total cash requirement of a company is ₹ 2 crore next year, the opportunity cost of funds is 15 percent per annum and the cost of conversion from securities to cash per transaction is ₹ 150, the optimum cash balance as per Baumol’s Model will be :
Let the face value of commercial paper be denoted by F.V., net amount realised from the commercial paper be NAR, maturity period of commercial paper be MP. The effective pre - tax cost of commercial paper shall be :
The average spread between the cost of goods sold and the sales revenue is indicated by :
EBIT - EPS indifference point is the level of :
The Gaia hypothesis was propounded in 1999 by :
From the following two statements of Assertion (A) and Reasoning (R), indicate the correct code:
Assertion (A): The quantity of a product demanded invariably changes inversely to changes in its price.
Reason (R): The price effect is the net result of the positive substitution effect and negative income effect.
Codes:
Match the items of the List-I with that of the List-II and suggest the correct code from the following:
List-I List-II i. Cost function a. Kinked demand ii. Supply function b. Isoquants iii. Production function c. Engineering method iv. Oligopoly d. Factor prices Codes:
Match the items of List-I with those of List-II and indicate the correct code from the following:
List-I List-II i. Sale of existing firm to the management a. Reverse synergy ii. Financing acquisition with substantial secured borrowings b. Management buyout iii. Firms demerged worth more to other firms c. Reverse capital budgeting iv. Cash inflows on demerger at present at the sacrifice in form of cash out-flow on transfer of division/asset d. Leveraged buyout Codes:
The credit policy of a firm is not decided for which combination of the following?
a. Maximisation of sales
b. Minimisation of bad debt losses
c. Maximisation of collection from debtors
d. Minimisation of adverse effect on the volume of sales
Codes:
Important Questions from Miscellaneous
Read the given figure and find the region representing persons who are educated and employed but not confirmed in job.
The magazine in which Mahatma Gandhi mentioned what he wanted the Constitution to do is:
Which gas shields the surface of the earth from ultraviolet radiation from the sun?
Which event is marked as an Intangible Cultural Heritage of Humanity by UNESCO?
Who has been conferred with the rank of the Commander of the Order of the British Empire in 2018?
