Question

For two hypothetical economies A and B, the value of Marginal Propensity to Consume (MPC) stands at 0.6 and 0.8 respectively. Assuming for both the economies, Autonomous Consumption (c̅) to be ₹ 40 crore and Investment Expenditure (I) to be ₹ 100 crore.

Calculate:

1. Break-even level of income for Economy A
2. Equilibrium level of income for Economy B

Answer 1

Given,

Autonomous Consumption (c̅) = ₹ 40 crore

Investment expenditure (I) = ₹ 100 crore

For economy A, Marginal Propensity to Consume (MPC) = 0.6

For economy B, Marginal Propensity to Consume (MPC) = 0.8

1. At break-even level for economy A; Y = C
   Y = 40 + 0.6Y
   0.4Y = 40
   Y = ₹ 100 crore
2. Equilibrium level of income for economy B; Y = C + I
   Y = c̅ + (MPC) × Y + I
   Y = 40 + 0.8Y + 100
   Y = ₹ 700 crore