Question:
Assume that in an economy the marginal propensity to consume out of disposable national income is 0.8 and the government taxes all income at a constant rate of 25%. If Gross National Income in this economy increases by Rs. 200 billion, consumption will initially increase by
(1) Rs. 50 billion.
(2) Rs. 120 billion.
(3) Rs. 150 billion.
(4) Rs. 160 billion.
(5) Rs. 750 billion.
Correct Answer:
(2)
Answer Explanation:
First, find the change in disposable income: An increase of 200 in gross income, taxed at 25%, leaves 75% as disposable income (200 x 0.75 = 150). Then, apply the MPC to the disposable income to find the change in consumption: 150 x 0.8 = 120.
Topic: Consumption Theory Year: 2022
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