Question

Read the following statements carefully: Statement 1: If in an economy the level of income increases (\( \Delta Y \)), it will always proportionately increase the level of consumption (\( \Delta C \)). 
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:

For MPC and MPS, always remember: \( MPC + MPS = 1 \), but they are not necessarily equal.

Answer 1

The Correct Option is D

Statement 1 is inaccurate. Consumption rises with income, but not necessarily at the same rate, as savings and spending habits also influence it. Statement 2 is inaccurate. \( MPC + MPS = 1 \) indicates that the marginal propensity to consume and the marginal propensity to save sum to one, but they are not necessarily equal. For instance, if \( MPC = 0.8 \), then \( MPS = 0.2 \).