Determination of National IncomePYQ - Nov 2020 (Inter)Question 117 of 20
All Questions

MPC + MPS = ?

Options

A0
B1
CInfinity
DNone
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Correct Answer

✅ Option b — 1

All Options:

  • A0
  • B1
  • CInfinity
  • DNone

Detailed Solution & Explanation

To understand the relationship between MPC (Marginal Propensity to Consume) and MPS (Marginal Propensity to Save), we need to consider the basic principles of macroeconomics. • The Marginal Propensity to Consume (MPC) is the change in consumption resulting from a change in income. • The Marginal Propensity to Save (MPS) is the change in saving resulting from a change in income. • According to Keynesian economics, when income increases, a part of it is spent (consumption) and the rest is saved. • The sum of MPC and MPS represents how the additional income is allocated between consumption and saving. • Since the entire additional income is either consumed or saved, the sum of MPC and MPS equals 1, as it represents the entire allocation of the increased income. The correct answer is right because it reflects the fundamental principle that the total increase in income is divided between consumption and saving. Option A is incorrect because it implies that neither consumption nor saving changes with an increase in income, which contradicts basic economic behavior. Option C is also incorrect as it suggests an infinite allocation, which is not possible in the context of income allocation between consumption and saving.

About This Chapter: National Income

Paper

Paper 4: Business Economics

Weightage

15%

Key Topics

Aggregates, Measurement, Keynesian Theory

A crucial chapter covering national income aggregates like GDP, GNP, NDP, NNP, and the methods of measuring national income (Income, Expenditure, and Output methods). It also introduces Keynesian Theory including the concepts of Aggregate Demand, Consumption Function, and the Multiplier.

View Official ICAI Syllabus

Exam Strategy Tip

Practice numerical questions on GDP/GNP calculations and the Multiplier. These are guaranteed marks in every exam. Also understand the circular flow of income clearly.

More Questions from Determination of National Income

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