Question

Answer the following questions based on the figure given below:

1. At which level of income, Average Propensity to Consume will be equal to one, and why?
2. What is the significance of the saving curve above the point B?

Answer 1

(i) For the APC to be equal to 1, Income has to be equal to Consumption, leading to Savings be 0.

0 = −50 + 0.2 Y

0.2 Y = 50

Y = 50 ÷ 0.2

= ₹ 250 crores

Thus, APC will be one when the income is equal to ₹ 250 crores.

(ii) The importance of the saving curve above point B is as follows:

1. Consumption is lower than income, which results in savings.
2. There is investment in the economy.
3. There are positive savings, and they continue to increase.