Question

Consider the following information:

MPC = 0.9

Autonomous Investment = R200 m

Autonomous Consumption = R70 m

The equilibrium level of income is:

1. R300 m
2. R700 m
3. R2 000 m
4. R2 700 m
5. Impossible to calculate from the information given.

Answer 1

Marginal propensity to consume: It measures the proportion of the change in the consumption level because of the change in income of the consumer.

It is calculated using the below-mentioned formula;

$MPC =\frac{ ∆C} {∆Y}$

Here ∆C is the change in the consumption

∆Y is the change  in the income

Given that,

MPC = 0.9

Autonomous Investment = R200 m

Autonomous Consumption = R70 m

At equilibrium level,

National income = Autonomous Investment + Autonomous Consumption 

            $= R200 m + R70 m\\ = R270 m$

So equilibrium level of income$= \frac{National\space income} {MPC}$

So equilibrium level of income $= \frac{270}{ 0.9} = R300 m$

Based on the above reasoning we can conclude that option 1 "R300 m" is the correct option.