Answer to Question #246418 in Macroeconomics for Biba

Question

6. “Along the consumption function, income changes more than consumption.” What does this imply for the MPC and MPS?

Answer 1

The MPC is the marginal propensity to consume, which is the change in consumption because of the change in income. Similarly, MPS is a marginal propensity to save that is a change in savings because of a change in the income of a person.

The income earned by the people is either consumed or saved. As the income increases consumption increases but an increase in income is more than the increase in consumption. This implies, as income increases, there is also an increase in savings.

If the change in consumption is always less than the change in income, the value of MPC will always be less than one. Similarly, when a change in savings is always less than one, hence, the value of MPS is also less than one.