Consider a simple Keynesian closed economy model with the following information:
The Marginal Propensity to Consume (MPC) is 0.9 and the initial level of saving is INR 120. When income rises by INR 100, then the new level of saving will be INR ____________ (in integer).
Consider a simple Keynesian closed economy model with the following information:
The Marginal Propensity to Consume (MPC) is 0.9 and the initial level of saving is INR 120. When income rises by INR 100, then the new level of saving will be INR ____________ (in integer).
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Solution and Explanation
\[ {MPC} + {MPS} = 1 \Rightarrow {MPS} = 1 - 0.9 = 0.1 \] Step 2: Calculate change in savings.
If income increases by INR 100, then: \[ \Delta S = {MPS} \cdot \Delta Y = 0.1 \cdot 100 = 10 \] Step 3: Add to initial savings. \[ {New savings} = 120 + 10 = \boxed{130} \]
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