- The average propensity to consume APC is calculated as: a) change in consumption divided by change in income. b) the level of consumption divided by the level of income. c) the level of income divided by the level of consumption. d) change in income divided by change in consumption. e) the level of consumption divided by the change in consumption. 18. The consumption schedule shows: a) that the MPC increases in proportion to GDP. b) that households consume more when interest rates are low. c) that consumption depends primarily on the level of business investment. d) the amounts households intend to consume at various possible levels of disposable income. e) that consumption depends primarily on the price level.
The correct answer and explanation is:
Question 17 Answer: (b) the level of consumption divided by the level of income.
The Average Propensity to Consume (APC) refers to the proportion of income that is spent on consumption rather than being saved. It is calculated as: APC=Consumption (C)Income (Y)APC = \frac{\text{Consumption (C)}}{\text{Income (Y)}}
This metric gives an overview of how much individuals or households spend on consumption for every unit of income earned. For example, if a household earns $100 and spends $80, the APC would be 80100=0.8\frac{80}{100} = 0.8, meaning 80% of their income is spent on consumption.
It is important to note that APC is different from the Marginal Propensity to Consume (MPC), which measures the proportion of additional income spent on consumption. APC provides a snapshot of overall spending behavior relative to income levels, and it typically decreases as income rises because households with higher incomes tend to save a larger proportion of their earnings.
Question 18 Answer: (d) the amounts households intend to consume at various possible levels of disposable income.
The consumption schedule is a graphical representation or table that shows the relationship between disposable income and the amount households plan to spend on consumption. It illustrates the tendency of households to increase consumption as their income rises but at a diminishing rate. This behavior reflects the idea that as disposable income increases, people can afford to save more, leading to a lower proportion of income being spent on consumption.
Key points about the consumption schedule:
- Direct Relationship: The schedule typically shows a positive correlation between disposable income and consumption. Higher income leads to higher consumption.
- Marginal Propensity to Consume (MPC): The slope of the consumption schedule reflects the MPC, which indicates how much of each additional dollar of income is spent on consumption.
- Autonomous Consumption: Even at zero income, there may be a base level of consumption (e.g., for necessities), which is called autonomous consumption.
The consumption schedule is foundational in macroeconomics, as it helps explain consumer behavior, aggregate demand, and the multiplier effect in economic models.