Question

Consider Table 12-2. What is the average propensity to consume at the equilibrium level of real GDP? What is the average propensity to save?

Short answer

the average propensity to consume at the equilibrium level of real GDP is$0.84$and the average propensity to save is$0.16$.

Step-by-step solution

introduction

The average propensity to consume is the negligible part of extra cash that is spent on utilization. It is determined by separating utilization from the discretionary cash flow. The average propensity to save is the negligible part of extra cash that is saved. It is determined by partitioning absolute savings by the degree of discretionary cash flow.

explanation part (1)

The average propensity to consume at equilibrium =$\begin{array}{r}\frac{Consumption}{Disposableincome}\end{array}=\frac{C}{D}$

$=\frac{12.4}{14.8}=0.837$

We know, Disposable income = consumption $+$savings

$D=C+S$

explanation part (2)

Dividing by above eq. by Disposable income,

$\frac{D}{D}=\frac{C}{D}+\frac{S}{D}$

We get, average propensity to consume$+$average propensity to save = $1$

$\Rightarrow$average propensity to save =$1-$average propensity to consume

Hence, the average propensity to save is $1-0.83=0.16$.