question_answer

Giving reasons state whether the following statements are true or false.

(i) If the ratio of MPC and MPS is 4: 1, the value of investment multiplier will be 4.

(ii) Sum of APC and MPC is always equal to 1.

Or Giving reasons state whether the following statements are true or false.             

(i) When MPC is zero, the value of investment multiplier will also be zero.

(ii) Value of APS can never be less than zero.

Answer:

(i) No, the statement is false. If the ration of Marginal propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is 4:1, then the value of investment multiplier is 5 and not 4. Here,                 \[MPC=\frac{4}{4+1}=\frac{4}{5}0.8\] as\[\frac{MPC}{MPS}=\frac{4}{1}\]                         \[K=\frac{1}{1-0.8}=\frac{1}{0.2}=5\] (ii) No, the statement is false. The sum of Average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC) is not necessarily 1. Consider the following schedule:            

Income (Y)	Consumption[C]	Change in Income\[(\Delta Y)\]	Change in Consumption \[(\Delta C)\]	Average Propensity to Consume (C/Y)	Marginal Propensity to Consume\[(\Delta C/\Delta Y)\]
1,000	800	?	?	0.8	?
1,500	1,200	500	400	0.8	0.8

In the given schedule, APC=0.8 and MPC=0.8 and \[0.8+0.8\ne 1\] Therefore, the sum of APC and MPC is not1. i.e. \[APC+MPC\ne 1\] (i) No, the statement is false. When Marginal Propensity to Consume (MPC) is zero, the value of investment multiplier will be 1(not zero)             \[K=\frac{1}{1-MPC}\]   Or         \[K=\frac{1}{1-0}=\frac{1}{1}=1\] (ii) No, the statement is false Average Propensity to Save (APS) represents the ratio between savings and income. When consumption expenditure is more than income, then it gives rise to negative savings or dis- savings. In this case, APS will be negative.