Question

An economy is in equilibrium. Calculate the Marginal Propensity to Save from the following:
National income = 1000
Autonomous Consumption = 100
Investment = 120

Answer 1

Consumption Function, C = 100+ 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 = 100 + b (1,000) + 120

=> 1,000 = 220+ 1,000 b

=> 1,000 b = 1,000 - 220

=> b = 780/ 1,000 = 0.78.

Since MPC = 0.78,

MPS = 1- MPC

= 1- 0.78 = 0.22.