ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Detailed explanation-1: -Average propensity to consume refers to the ratio of consumption expenditure to the corresponding level of income. Then: APC C/Y = 70/100 = 0.70, i.e. 70% of the income is spent on consumption.
Detailed explanation-2: -Average propensity to consume is calculated by dividing an entity’s consumption by the entity’s total income.
Detailed explanation-3: -In the long run, because income rises faster than consumption, with increasing income, APC converges to MPC. So MPC=APC in the long run and it is constant for Ca=0. (Mathematically from the consumption function: C=cY, after dividing it by income we get APC=(cY)/Y=c=MPC.)
Detailed explanation-4: -The average propensity to consume or APC represents the ratio of total consumption to total income.