In the Keynesian Cross (zero tax), government purchase rises from ₹ 100 to ₹ 125 and equilibrium income increases from ₹ 1300 to ₹ 1400. Using this, the marginal propensity to consume (round off to two decimals) is ____________.
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Correct Answer: 0.71
Solution and Explanation
$\Delta Y=1400-1300=100,\;\Delta G=125-100=25 \Rightarrow k=\dfrac{\Delta Y}{\Delta G}= \dfrac{100}{25}=4.$
Step 2: Back out MPC.
In the simple model, $k=\dfrac{1}{1-c} \Rightarrow 4=\dfrac{1}{1-c} \Rightarrow 1-c=\dfrac{1}{4} \Rightarrow c=0.75.$
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