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Question
What do you mean by propensity to consume?
Solution
- The consumption function or propensity to consume refers to the income consumption relationship. It is a “functional relationship between two aggregates viz., total consumption and gross national income.”
- Symbolically, the relationship is represented as C = f(Y) Where, C = Consumption; Y = Income; f = Function
- Thus the consumption function indicates a functional relationship between C and Y, where C is the dependent variable and Y is the independent variable, i.e., C is determined by Y. This relationship is based on the ceteris paribus (other things being same) assumption, as only income consumption relationship is considered and all possible influences on consumption are held constant
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