Question

In an economy, Investment increases by Rs. 200 crores. As a result, the total income increases by 1,000 crores. Calculate the MPC. (0.80)

Answer 1

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and the corresponding change in consumption.

Multiplier(k) => Change in income / change ininvestment = 1/ (1-MPC)

=> 1000/200 = 1/(1- MPC)

=> 10 - 10 MPC = 2

=> 10 MPC = 8

=> MPC = 0.8.