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.
Choose the correct alternative from the following:

• 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:

When evaluating economic statements, always verify relationships like MPC + MPS = 1 and consider realistic economic behavior rather than absolute assumptions.

Answer 1

The Correct Option is D

Step 1: Analysis of Statement 1.
Statement 1 suggests that any increase in income (\( \Delta Y \)) will proportionately increase consumption (\( \Delta C \)). This is incorrect because the increase in consumption depends on the Marginal Propensity to Consume (MPC), which is typically less than 1. Thus, consumption increases, but not proportionately.
Step 2: Analysis of Statement 2.
Statement 2 claims that Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) are always equal. This is incorrect because MPC + MPS = 1; they are complementary, not equal.
Step 3: Conclusion.
Both statements are false, so the correct answer is \( \mathbf{(D)} \).