Question

Match List-I with List-II:

List-I	List-II
(A) Average propensity to save	(I) Inversely related to the investment multiplier
(B) Average propensity to consume	(II) Ratio of change in consumption to change in income
(C) Marginal propensity to save	(III) Always less than one
(D) Marginal propensity to consume	(IV) Can’t be zero

Choose the correct answer from the options given below:

• A. (A)-(I), (B)-(II), (C)-(III), (D)-(IV)
• B. (A)-(III), (B)-(IV), (C)-(I), (D)-(II)
• C. (A)-(I), (B)-(III), (C)-(IV), (D)-(II)
• D. (A)-(III), (B)-(II), (C)-(IV), (D)-(I)

Answer 1

The Correct Option is A

APS is inversely related to the investment multiplier, and MPC cannot be zero.

Answer 2

APS (Average Propensity to Save) is inversely related to the investment multiplier. The investment multiplier depends on the MPC (Marginal Propensity to Consume) and MPS (Marginal Propensity to Save), where MPC + MPS = 1. A higher MPS leads to a smaller multiplier, while a higher MPC leads to a larger multiplier. Since APS is calculated as the ratio of savings to income (S/Y), and APS = 1 - MPC, a higher APS corresponds to a lower MPC, which results in a lower multiplier.

MPC cannot be zero because if it were zero, it would imply that no income is being consumed, which would mean that any additional income would not stimulate demand in the economy. This would render the multiplier effect ineffective, as no further economic activity would be generated from additional investment. Therefore, for the multiplier to have an effect and for the economy to be responsive to investment, MPC must always be greater than zero.