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Chapter 10: Q3. (page 214)

If the MPS rises, then the MPC will

  1. fall.

  2. rise.

  3. stay the same.

Short Answer

Expert verified

Option (a): fall

Step by step solution

01

Meaning of MPS and MPC

Marginal propensity to save (MPS) is the tendency of an individual (or the economy) to save out of total income, given by the following formula:

MPS=鈻�Savings鈻�Income

Marginal propensity to consume (MPC) is the tendency of an individual (or the economy) to consume out of their total income (or national income), given by the following formula:

MPC=鈻�Consumption鈻�Income

02

Explanation for the correct option

As income is divided between consumption expenditure and saving, the relation between MPC and MPS is shown below:

Y=C+S鈻�Y=鈻�C+鈻�SDividingbychangeinicome鈻�Y鈻�Y=鈻�C鈻�Y+鈻�S鈻�Y1=MPC+MPSThus,MPC=1-MPS

Therefore, if MPS rises, MPC will fall.

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