Question:
In a closed economy with no government, an increase in investment of Rs. 200 million results in an increase in consumption of Rs. 800 million. What is the marginal propensity to consumption in this economy?
(1) 0.2
(2) 0.25
(3) 0.75
(4) 0.8
(5) 0.9
Correct Answer:
(4)
Answer Explanation:
First, find the total change in National Income ($Delta Y$). Since it is a closed, private economy, $Delta Y = Delta C + Delta I$. Therefore, $Delta Y = 800 + 200 = 1000$. The Marginal Propensity to Consume (MPC) is the ratio of the change in consumption to the change in income. $MPC = Delta C / Delta Y = 800 / 1000 = 0.8$.
Topic: Consumption Theory Year: 2024
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