If MPC = 2/3 and investment is N100 million, the level of national income is
Answer Details
MPC stands for Marginal Propensity to Consume, which refers to the percentage of each additional unit of income that a consumer will spend on consumption.
If the MPC is 2/3, this means that for every additional Naira earned, 2/3 of that amount will be spent on consumption, and 1/3 will be saved.
If investment is N100 million, it will increase the total income in the economy by a multiple of the initial investment. This multiple is called the multiplier. The formula for the multiplier is:
Multiplier = 1 / (1 - MPC)
In this case, the multiplier is:
Multiplier = 1 / (1 - 2/3) = 1 / (1/3) = 3
This means that every Naira of investment will generate N3 of total income in the economy.
Therefore, the level of national income is:
National Income = Investment * Multiplier = N100 million * 3 = N300 million
Therefore, the correct option is N300 million.