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Determination of Income and Employment — Economics STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceEconomicsDetermination of Income and Employment3 Marks
Question
State whether the following statements are true or false. Give reasons for your answer.
  1. When Marginal Propensity to consume is greater than Marginal Propensity to Save, the value of investment multiplier will be greater than 5.
  2. The value of Marginal Propensity to Save can never be negative.
✓

Answer

  1. No, the statement is false. This can be understood by an example. Suppose, the value of MPC = 0.6, hence, MPS = 0.4 (as MPS = 1- MPC).
Here, MPC > MPS

Now, $\text{K}=\frac{1}{1-\text{MPC}}=\frac{1}{1-0.6}$

$=\frac{1}{0.4}=2.5$

So, K < 5 even if MPC > MPS.
  1. Yes, the statement is true. As MPS tells about the change in savings due to change in income and even if the entire income is consumed, savings can be at most zero, so MPS can never be negative.

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