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CA Foundation · Business Economics · Determination of National Income

In Keynesian theory, the Average Propensity to Consume (APC) and Average Propensity to Save (APS) of an economy at any income level are related as:

APC + APS = 1, because all income is either consumed or saved. Dividing C + S = Y throughout by Y gives the average propensities summing to one. This holds at every income level, unlike MPC + MPS = 1, which relates to changes in income.

  1. AAPC + APS = 1Correct
  2. BAPC - APS = 1
  3. CAPC + APS = MPC
  4. DAPC × APS = 1

Explanation

Income is either consumed or saved, so C + S = Y. Dividing by Y gives APC + APS = 1. The option equating the sum to MPC confuses average and marginal measures, as MPC is the change in C per change in Y, not the ratio of C to Y.

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