Suppose for two imaginary economies A and B, the values of Marginal Propensity to Save (MPS) stand at 0.2 and 0.4 respectively. For both the economies, Autonomous Consumption (c̄) = Rs. 400 crore and Investment Expenditure (I) = Rs. 2,000 crore. Calculate the following : (a) Break-even level of income for Economy A. (b) Equilibrium level of income for Economy B.

Question

Accepted Answer

Given: Economy A: MPS = 0.2, c̄ = ₹400 crore, I₀ = ₹200 crore
Economy B: MPS = 0.4, c̄ = ₹400 crore, I₀ = ₹200 crore

### Economy A:
MPC = 1 - MPS = 1 - 0.2 = 0.8
Multiplier: k = 1/MPS = 1/0.2 = 5
Equilibrium Income: Y = Ā/(1-MPC) = 600/0.2 = ₹3,000 crore

### Economy B:
MPC = 1 - MPS = 1 - 0.4 = 0.6
Multiplier: k = 1/MPS = 1/0.4 = 2.5
Equilibrium Income: Y = Ā/(1-MPC) = 600/0.4 = ₹1,500 crore

### Comparison:
- Economy A has lower MPS (0.2) and thus higher multiplier (5)
- Economy B has higher MPS (0.4) and thus lower multiplier (2.5)
- Economy A's equilibrium income (₹3,000 crore) is double that of Economy B (₹1,500 crore)
- Lower MPS means higher MPC, which leads to larger successive rounds of spending
- This demonstrates the inverse relationship between MPS and the multiplier value