Question

Consider an island country called Arcadia. Assume that the aggregate price level is constant, the interest rate is fixed, and there are no taxes in this country. Assume that an increase of $300 in autonomous investment leads to an increase of $900 in equilibrium income.
Required:
1. If the marginal propensity to import equals.0.10, the marginal propensity to consume must be?

Answer 1

Answer:

If the marginal propensity to import equals.0.10, the marginal propensity to consume must be 0.2333333

Explanation:

In order to calculate the marginal propensity to consume (MPS), we would have to use the following formula:

Multiplier =1/(MPS+MPI)

Multiplier =change in income/change in autonomous spending

Multiplier =$900/$300

=3

Therefore,  3=1/(MPS+0.1)

3MPS+0.3=1

3MPS=0.70

MPS=0.70/3=0.2333333

If the marginal propensity to import equals.0.10, the marginal propensity to consume must be 0.2333333