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CA Foundation · Business Economics · Determination of National Income

In the Keynesian consumption function C = a + bY, where a > 0, which statement about the average propensity to consume (APC) is correct as income rises?

APC falls as income rises and approaches the MPC from above but stays higher than it. This is because APC equals a/Y plus b, and the autonomous component a/Y shrinks as income grows but never becomes zero.

  1. AAPC rises towards 1 as income rises
  2. BAPC falls and approaches the MPC (b) but stays above itCorrect
  3. CAPC stays constant and equal to b
  4. DAPC becomes lower than b at high income levels

Explanation

APC = C/Y = a/Y + b. As Y rises, a/Y falls, so APC declines and approaches b from above, never reaching it while a > 0. Option 3 holds only when a = 0. Option 4 is impossible because a/Y is always positive.

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