Question

Identify which of the following equations is true:

• A. MPC + MPS = 0
• B. MPC + MPS = 1
• C. (MPC + MPS) \(>\) 1
• D. (MPC + MPS) \(<\) 1

Hint:

Think of an extra rupee of income. If you spend 70 paise of it (MPC=0.7), you must save the remaining 30 paise (MPS=0.3). The two parts must always add up to the whole rupee (1).

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
This question deals with the fundamental relationship between the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS).
\begin{itemize} \item MPC: The proportion of an additional unit of income that is spent on consumption (\(\Delta C / \Delta Y\)). \item MPS: The proportion of an additional unit of income that is saved (\(\Delta S / \Delta Y\)). \end{itemize}

Step 2: Key Formula or Approach:
We know that total income (Y) is either consumed (C) or saved (S). \[ Y = C + S \] Any change in income (\(\Delta Y\)) must also be either a change in consumption (\(\Delta C\)) or a change in savings (\(\Delta S\)). \[ \Delta Y = \Delta C + \Delta S \]

Step 3: Detailed Explanation:
To find the relationship between MPC and MPS, we can divide the entire equation by \(\Delta Y\): \[ \frac{\Delta Y}{\Delta Y} = \frac{\Delta C}{\Delta Y} + \frac{\Delta S}{\Delta Y} \] Substituting the definitions of MPC and MPS, we get: \[ 1 = MPC + MPS \]

Step 4: Final Answer:
The sum of the Marginal Propensity to Consume and the Marginal Propensity to Save is always equal to one. Therefore, the true equation is MPC + MPS = 1, making option (B) the correct answer.