Question

In an economy, the ratio of MPC and MPS is 7:3. How much increase in income will increase the consumption by Rs 350 crores?

OR

In an economy, C = 300 + 0.5 Y and investment is 600. What will be the equilibrium level of income and consumption?

Answer 1

MPC = $\frac{7}{10}$

MPS = $\frac{3}{10}$

MPC = $\frac{\text{Change in consumption}}{\text{Change in income}}$

$\frac{7}{10}$ = $\frac{350}{\text{Change in income}}$

Change in income = Rs 500 crores

OR

At equilibrium,

AD = Y

C + I = Y

300 + 0.5 Y + 600 = Y

Y = 1800 Crores

C = 300 + 0.5 Y

Y = 300 + 0.5 (1800) = Rs.1,200 crores