in an economy an increase in investment leads to an increase in national income 3 times more than increase in investment. calculate mpc
Question
In an economy, an increase in investment leads to an increase in national income 3 times more than increase in investment. Calculate mpc.
Solution
The Marginal Propensity to Consume (MPC) can be calculated using the formula:
MPC = ΔC / ΔY
Where: ΔC = Change in consumption ΔY = Change in income
From the question, we know that an increase in investment leads to an increase in national income 3 times more than the increase in investment. This means that the multiplier is 3.
In a simple economy, the multiplier (k) is also calculated by the formula:
k = 1 / (1 - MPC)
So, we can set up the equation as follows:
3 = 1 / (1 - MPC)
Solving for MPC, we get:
1 - MPC = 1 / 3
MPC = 1 - (1 / 3)
MPC = 2 / 3 or approximately 0.67
So, the Marginal Propensity to Consume (MPC) in this economy is 2/3 or 0.67.
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