Answer to Question #126565 in Macroeconomics for Ashlin N Johny

Question

Find MPC, when multiplier (K) = 1.

Answer 1

Answer

$MPC = 0$

Workings

MPC stands for marginal propensity to consume. It is the change is consumer spending brought out by a change in income.

$MPC = \dfrac {∆C} {∆Yd}$ Where ∆C represents a change in consumption and ∆Yd is a change in disposable income.

Multiplier (k) represents a change in income due to a change in injections in the circular flow of income.

MPC is used to derive the multiplier (k) as follows:

$K = \dfrac {1} {MPS}$ Where MPS is the marginal propensity to save.

$MPC + MPS = 1$

Hence,

$MPS = 1 - MPC$

Therefore,

$K = \dfrac {1} {1 - MPC}$

It is given that K = 1, and hence,

$1 = \dfrac {1} {1 - MPC}$

Cross multiplying gives:

$1(1 - MPC) = 1$

$=> 1 - MPC = 1$

$=> 1 - 1 = MPC$

$=> MPC = 0$

So, when k = 1, MPC = 0