Class 12 > Previous Year Questions

Question

What is marginal propensity to consume? How is it related to marginal propensity to save?
Easy

Solution

Consumption expenditure (A) = Rs 50 Crores
MPS = 0.2
So, MPC = 1 − MPS
= 1 − 0.2
= 0.8
Y = 4000 Crores
We know that AD = A + cY (1)
Putting the values in equation (1)
AD = 50 + 0.8 × 4000
= 50 + 3200
= Rs 3250 Crores
But, Rs 3250 < Rs 4000
Implies that AD < Y
Hence, the economy is not in equilibrium.

"Consumption expenditure (A) =
Rs 50 Crores
MPS = 0.2
So, MPC = 1 − MPS
= 1 − 0.2
= 0.8
Y = 4000 Crores
We know that AD = A + cY (1)
Putting the values in equation (1)
AD = 50 + 0.8 × 4000
= 50 + 3200
= Rs 3250 Crores
But, Rs 3250 < Rs 4000
Implies that AD < Y
Hence, the economy is not in equilibrium. "

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