Question

In an economy, investment increases from 300 to 500. As a result of this, equilibrium level of income increases by 2,000. Calculate the marginal propensity to consume.
(Marginal Propensity to Consume = 0.9)

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 corresponding change in consumption.

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

=> 2,000/200 = 1/(1- MPC)

=> 10 - 10 MPC = 1

=> 10 MPC = 9

=> MPC = 0.9.