The sumof MPS and MPC is
The sumof MPS and MPC is
- A) greater than 1 but less than infinity
- B) greater than 0 but less than 1
- C) equal to 1
- D) none of the above
Correct Answer: C) equal to 1
Explanation
This question is asking about the relationship between MPS (marginal propensity to save) and MPC (marginal propensity to consume). MPS is the proportion of additional income that a person saves, while MPC is the proportion of additional income that a person spends. The question is asking for the sum of these two proportions.
The answer is Option C: the sum of MPS and MPC is equal to 1. This is because all income must either be saved or spent, so the sum of the proportions that represent these actions must be equal to 1. For example, if someone saves 20% of their income (MPS = 0.2), then they must spend 80% of their income (MPC = 0.8), which adds up to 1.
Understanding MPS and MPC is important because they are key concepts in Keynesian economics, which emphasizes the importance of government intervention to stimulate demand during times of economic downturns. By understanding how people will react to changes in their income (either by saving more or spending more), policymakers can make decisions about how to best allocate government spending or adjust taxes.
To learn more about MPS and MPC, please refer to your Economics textbook or other recommended resources.