Question

If the MPS rises, then the MPC will

1. fall.

2. rise.

3. stay the same.

Short answer

Option (a): fall

Step-by-step solution

Meaning of MPS and MPC

Marginal propensity to save (MPS) is the tendency of an individual (or the economy) to save out of total income, given by the following formula:

$MPS=\frac{△Savings}{△Income}$

Marginal propensity to consume (MPC) is the tendency of an individual (or the economy) to consume out of their total income (or national income), given by the following formula:

$MPC=\frac{△Consumption}{△Income}$

Explanation for the correct option

As income is divided between consumption expenditure and saving, the relation between MPC and MPS is shown below:

$$\begin{gathered} \mathrm{Y}=\mathrm{C}+\mathrm{S} \\ △\mathrm{Y}=△\mathrm{C}+△\mathrm{S} \\ \mathrm{Dividing}\mathrm{by}\mathrm{change}\mathrm{in}\mathrm{icome} \\ \frac{△\mathrm{Y}}{△\mathrm{Y}}=\frac{△\mathrm{C}}{△\mathrm{Y}}+\frac{△\mathrm{S}}{△\mathrm{Y}} \\ 1=\mathrm{MPC}+\mathrm{MPS} \\ \mathrm{Thus},\mathrm{MPC}=1-\mathrm{MPS} \end{gathered}$$

Therefore, if MPS rises, MPC will fall.