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Explain the relationship between average propensity to consume and average propensity to save. Can the value of average propensity to consume be greater than 1 ? Given reasons for your answer. |
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Answer» Solution :AVERAGE propensity to consume (APC) is the ratio of consumption expenditure ( C) and Income (Y), i.e. APC = `(C)/(Y)`. Average propensity to save (APS) is the ratio of saving (S) and income, i.e. APS = `(S)/(Y)`. As the income is CONSUMED or saved, the sum of APC and APS is always equal to 1. The higher (lower) the APC, the lower (higher) will be the APS. The VALUE of APC can be greater than one if C is greater than Y. At very low levels of income, savings are spent to meet the very BASIC necessities. So, at these levels of income, C is greater than Y and thus, value of APCcan be greater than 1. |
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