Question

Read the following statements carefully:
Statement 1: If in an economy the level of income increases (\(ΔY\)), it will always proportionately increase the level of consumption (\(ΔC\)).
Statement 2: Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) are always equal to each other.

• A. Statement 1 is true and Statement 2 is false.
• B. Statement 1 is false and Statement 2 is true.
• C. Both Statements 1 and 2 are true.
• D. Both Statements 1 and 2 are false.

Hint:

Carefully analyze statements related to MPC, MPS, and the proportionality of income and consumption changes.

Answer 1

The Correct Option is D

- Statement 1: False. An increase in income (\(ΔY\)) causes an increase in consumption (\(ΔC\)), but the increase is not necessarily proportional. This is because the Marginal Propensity to Consume (MPC) determines the extent of the increase, and the MPC is always less than 1.
- Statement 2: False. While it is true that \(MPC + MPS = 1\), the MPC and MPS are not always equal. For instance, if the \(MPC = 0.7\), then the \(MPS = 0.3\).