Question

Calculate Marginal Propensity to consume from the following data about an economy which is in equilibrium:
National income =2000
Autonomous consumption expenditure=200
Investment expenditure =100

Answer 1

Given:

National income(Y)=2000

Autonomous consumption expenditure=200

Investment expenditure=100

In an equilibrium, we have:

$Y=C+I$

since $C=\overline{C}+cY$, we have

$Y=\overline{C}+cY+1$

$\Rightarrow 2000=200+c\left(2000\right)+100$

$\Rightarrow 1700=2000c$

$\Rightarrow =0.85$

Therefore, the marginal propensity to consume is 0.85.