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Questions and Answers
If national income goes up by ₹1000 crore, total consumption in the economy will go up by 0.8 × ₹1000 crore, i.e by ₹______ crore.
800
The autonomous consumption (C) is ₹______ crore when the national income is ₹900 crore.
100
At a national income of ₹1,200 crore, the consumption function gives a total spending level of ₹______ crore.
1000
The value of Marginal Propensity to Consume (MPC) calculated in the hypothetical economy is ______.
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MPC can range from 0 to ______, since consumption cannot exceed the increase in income.
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The new value of APC is calculated as 78 divided by ______.
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In Imagenia, the autonomous consumption is ______ crore.
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The marginal propensity to consume in Imagenia is ______.
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After the tax policy change, the disposable income is reduced to ______ crore.
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When income (Y) is ₹500 crore, the consumption (C) is ______ crore.
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Study Notes
Consumption Function
- The function that shows the relationship between consumption and income
- Represented by equation: C = C + bY
- Where: C = Autonomous consumption
- C = Consumption expenditure
- Y = National income
- b = Marginal Propensity to Consume (MPC)
- MPC is the change in consumption due to a change in income, represented by the slope of the consumption function
- In the text example, the consumption function is C = 100 + 0.75Y
- C = 100 crore (autonomous consumption)
- b = 0.75 (MPC)
- Meaning: For every ₹1 increase in income, consumption expenditure rises by ₹0.75
- The consumption function shows that consumption is dependent on income, but also includes a portion of consumption that occurs even when income is zero (autonomous consumption)
Marginal Propensity to Consume (MPC)
- MPC is the ratio of change in consumption expenditure to change in income
- MPC = ΔC/ΔY
- Takes values between 0 and 1, meaning that consumption can never increase by more than the increase in income
- An MPC of 0.6 means that for every ₹1 increase in income, consumption expenditure increases by ₹0.6
Average Propensity to Consume (APC)
- APC is the ratio of total consumption expenditure to total income
- APC = C/Y
- Values between 0 and 1, meaning that consumption cannot exceed income
- As income increases, APC generally decreases
Savings Function
- Shows the relationship between savings and income
- S = Y - C, where:
- S = Savings
- Y = Income
- C = Consumption expenditure
- Derivable from the consumption function
- Represented by equation: S = -C + sY
- Where: -C = Dissavings at zero income
- s = Marginal Propensity to Save (MPS)
- Y = National income
Marginal Propensity to Save (MPS)
- MPS is the ratio of change in savings to change in income
- MPS = ΔS/ΔY
- Takes values between 0 and 1.
- Represents the proportion of each additional rupee of income that is saved
- MPS and MPC are complements and their sum is always equal to 1 (MPS + MPC = 1)
Average Propensity to Save (APS)
- APS is the ratio of total savings to total income
- APS = S/Y
- Values between 0 and 1
- As income increases, APS generally increases
Relationship between Consumption and Savings
- Complementary curves
- Consumption curve can be derived from savings curve and vice-versa
- As income increases, APC decreases, and APS increases which means people tend to consume a smaller proportion of their income and save a larger proportion.
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Description
This quiz delves into the concept of the consumption function and the marginal propensity to consume (MPC). It explores how consumption expenditure is influenced by changes in income and the significance of autonomous consumption. Test your understanding of these crucial economic principles.
