Question

: In a hypothetical economy, without taxes, the consumption(C) at different levels of real GDP (Y) is
given here under:
Real GDP Consumption (Rs in Billion)
(Y) (C)
3,000 1,500
5,000 3,000
Determine the size of MPC (Marginal propensity to consume), MPS (Marginal propensity to save) and multiplier

Answer 1

MPC is share of additional income that consumer spend on consumption.

MPC = $\frac{ΔC}{ΔY}$

$\frac{3000-1500}{5000-3000}.$

=$\frac{1500}{2000}$

MPC = 0.75

MPS

MPC+ MPS= 1 Since there is no tax for this case.

$0.75+MPS= 1$

MPS = $1 - 0.75$

MPS = 0.25.

Multiplier

denoted as k

k= $\frac{1}{1-mpc}$

k=$\frac{1}{1-0.75}$

k =$\frac{1}{0.25}$

k= 4.