Read the below statements marked as Assertion (A) and Reason (R). Mark the correct option:
Assertion (A): Increase in autonomous investment leads to a multiplied rise in national income.
Reason (R): This happens because of the marginal propensity to save being less than one.
Show answer & explanation
Correct answer: A
Explanation
The correct answer is option 1 i.e. Both A and R are true, and R is the correct explanation of A.
The multiplier effect ensures that an initial increase in autonomous investment generates a more than proportionate increase in national income. This occurs because one person's spending becomes another's income, leading to further rounds of consumption.
The intensity of this rise depends on the Marginal Propensity to Consume (MPC). Since the Marginal Propensity to Save (MPS) is less than one, people spend a portion of their additional income (MPC = 1 - MPS). As long as consumption continues (MPC > 0), the national income will keep rising through successive rounds.