Q17 of 25 Page 1

The consumption function of an economy is : C = 40 + 0 �8 Y (amount in <crores). Determine what level of income where the average propensity to Consume (APC) will be one.

OR


Which of the two, average propensity to consume or average propensity to save, can be negative and why?


APC=C/Y


C=consumption


Y=Income


Given: Equilibrium Income


C = 40 + 0.8 Y


Given APC=1


• 1=40+0.8Y/Y


• Y=40+0.8Y


• 0.2Y=40


• Y=200


So when income is 200, APC will be 1.


OR


Average propensity to save(APS) is the ratio of saving to the level of saving income. It can never be 1 or more than 1 because savings can never be equal or more than the national income. However, APS can be negative or less than 1 because when income levels are lower people will consume less.


More from this chapter

All 25 →
15

State the role played by the central bank as the ‘‘lender of last resort’’.

 16

Suppose you are a member of the ‘‘Advisory Committee to the Finance Minister of India’’. The Finance Minister is concerned about the rising Revenue Deficit in the budget. Suggest anyone measure control the rising Revenue Deficit of the

government.


 18

Describe the adjustments that may take place in an economy when ex-ante savings are less than ex-anteinvestments.

 19

Explain, using a numerical example, how an increase in reserve deposit

ratio affects the credit creation power of the banking system.