1 mark, −0.333MacroeconomicsConsumption and investmentThe Keynesian consumption functionEasyabout 1 min

GATE 2023 Question 31: Consumption and investment

Consider the Keynesian consumption function $C = \alpha + \beta Y$ , where $C$ is the aggregate consumption, $Y$ is the aggregate income, $\alpha$ is a constant ( $\alpha>0$ ), and $\beta$ is the marginal propensity to consume ( $0<\beta<1$ ). Then, the average propensity to consume is

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Answer and worked solution

Answer: (B)

Average propensity to consume is defined as $APC = C/Y$ .

$APC = \frac{C}{Y} = \frac{\alpha+\beta Y}{Y} = \frac{\alpha}{Y} + \beta$

Therefore the answer is (B) $\dfrac{\alpha}{Y}+\beta$ .

The trap: (D)

\alpha+\dfrac{\beta}{Y}

Students sometimes divide only the constant term $\alpha$ by $Y$ and mistakenly leave $\beta$ (not $\beta Y$ ) as the numerator over $Y$ in the second term, i.e. computing $\alpha+\beta/Y$ instead of $\alpha/Y+\beta$ — a simple algebra slip when splitting the fraction $\frac{\alpha+\beta Y}{Y}$ .

Plain-text version

Consider the Keynesian consumption function C = α + β Y, where C is the aggregate consumption, Y is the aggregate income, α is a constant (α>0), and β is the marginal propensity to consume (0<β<1). Then, the average propensity to consume is (A) α (B) α/Y+β (C) α Y+β Y² (D) α+β/Y

Also written as: Consider the Keynesian consumption function C = alpha + beta Y, where C is the aggregate consumption, Y is the aggregate income, alpha is a constant (alpha>0), and beta is the marginal propensity to consume (0<beta<1). Then, the average propensity to consume is

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What this question tests

This question is on The Keynesian consumption function, part of Consumption and investment in Macroeconomics.

Consumption as a function of current income: the propensities to consume and save.

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