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. While an increase in income (\(ΔY\)) leads to an increase in consumption (\(ΔC\)), the increase is not necessarily proportionate, as it depends on the Marginal Propensity to Consume (MPC), which is always less than 1. 
- Statement 2: False. \(MPC + MPS = 1\), but MPC and MPS are not always equal. For example, if \(MPC = 0.7\), then \(MPS = 0.3\).