Question

An economy is in equilibrium. Calculate Marginal Propensity to Consume:
National Income = 1,000
Autonomous Consumption Expenditure = 200
Investment Expenditure = 100
(Marginal Propensity to Consume = 0.70)

Answer 1

Consumption Function is C = 200+ b Y where Y in the income in the economy and b= marginal propensity to consume.

At equilibrium level of output,

AS=AD

Y= C+I

=> 1,000 = 200 + b (1,000) + 100

=> 1,000 = 300+ 1,000 b

=> 1,000 b = 1,000 - 300

=> b = 700/ 1,000 = 0.7.