Suppose for two imaginary economies A and B, the value of Marginal Propensity to Consume (MPC) stands at 0.5 and 0.8 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: MPC = 0.5, c̄ = ₹400 crore, I₀ = ₹200 crore
Economy B: MPC = 0.8, c̄ = ₹400 crore, I₀ = ₹200 crore

### Economy A:
Multiplier: k = 1/(1-MPC) = 1/(1-0.5) = 1/0.5 = 2
Equilibrium Income: Y = Ā/(1-MPC) = 600/0.5 = ₹1,200 crore

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

### Comparison:
- Economy A has lower MPC (0.5) and thus lower multiplier (2)
- Economy B has higher MPC (0.8) and thus higher multiplier (5)
- Economy B's equilibrium income (₹3,000 crore) is 2.5 times that of Economy A (₹1,200 crore)
- Higher MPC means people spend a larger proportion of additional income, creating stronger multiplier effects
- This confirms the direct relationship between MPC and the multiplier value