Question

Calculate the Marginal Propensity To Consume (MPC), if in an Economy, autonomous consumption is Rs 500 Crore ex-ante investments are Rs4000 Crore and EQUILIBRIUM level of income of the economy is Rs 18000 Crore.

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Answer 1

Answer:

As given in the examination problem, Equilibrium Income (Y) = Rs 4000 crore Autonomous Investment + Autonomous Consumption (\bar { A\quad } ) = Rs 50 crore MPS = 0.2

So, MPC(b) = 1 – 0.2 = 0.8

(MPC = 1 – MPS)

AD = C + I

AD = \bar { C } + bY + I = \bar { A\quad } + bY

= 50 + 0.8Y (\bar { A\quad } =\bar { C } +\bar { I } )

As we know, the equilibrium level of national income in two-sector model is determined where,

AS = AD

Y = 50 + 0.8Y

4000 = 50 + 0.8(4000)

4000 = 50 + 3200

4000 =3250

Hence, the economy is not in equilibrium.

I THINK THIS RIGHT

Explanation: