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Consider a simple Keynesian model without government spending or taxation. Suppose autonomous consumption is 500 and autonomous investment is 300 and the equilibrium level of output is 2400. Then the marginal propensity to consume is: Group of answer choices2/33/53Uncertain, not enough information.

Question

Consider a simple Keynesian model without government spending or taxation. Suppose autonomous consumption is 500 and autonomous investment is 300 and the equilibrium level of output is 2400. Then the marginal propensity to consume is: Group of answer choices2/33/53Uncertain, not enough information.

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Solution

In the simple Keynesian model, the equilibrium level of output (Y) is determined by the sum of autonomous consumption (C), autonomous investment (I), and induced consumption, which is the marginal propensity to consume (MPC) times the level of income (Y). This can be expressed as:

Y = C + I + MPC*Y

Given that autonomous consumption (C) is 500, autonomous investment (I) is 300, and the equilibrium level of output (Y) is 2400, we can substitute these values into the equation:

2400 = 500 + 300 + MPC*2400

Solving for MPC, we get:

MPC = (2400 - 500 - 300) / 2400 = 1600 / 2400 = 2/3

So, the marginal propensity to consume is 2/3.

This problem has been solved

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