Suppose for two imaginary economies A and B, the value of Marginal Propensity to Consume (MPC) stands at 0.8 and 0.6 respectively. For both the economies, Autonomous Consumption (c-bar) = 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 = 0.8, c̄ = ₹400 crore, I₀ = ₹200 crore
Economy B: MPC = 0.6, c̄ = ₹400 crore, I₀ = ₹200 crore

### Economy A:
Multiplier: k = 1/(1-MPC) = 1/(1-0.8) = 1/0.2 = 5
Equilibrium Income: Y = Ā/(1-MPC) = (400+200)/0.2 = 600/0.2 = ₹3,000 crore

### Economy B:
Multiplier: k = 1/(1-MPC) = 1/(1-0.6) = 1/0.4 = 2.5
Equilibrium Income: Y = Ā/(1-MPC) = (400+200)/0.4 = 600/0.4 = ₹1,500 crore

### Comparison:
- Economy A has higher MPC (0.8) and thus higher multiplier (5)
- Economy B has lower MPC (0.6) and thus lower multiplier (2.5)
- Economy A's equilibrium income (₹3,000 crore) is double that of Economy B (₹1,500 crore)
- The higher MPC in Economy A leads to larger successive rounds of spending, amplifying the multiplier effect
- This demonstrates the direct relationship between MPC and the multiplier value