Q.What is marginal propensity to consume? How is it related to marginal propensity to save?

Showing the 12 most recent of 104 on this concept.

1. CBSE 2026Set 58/1/11 markMCQ
   Q.Identify, which of the following is true at the Break Even level of Income. (Choose the correct option) Options : (A) Slope of Consumption Curve = Slope of Saving Curve (B) Average Propensity to Consume (APC) = Average Propensity to Save (APS) (C) Slope of Saving Curve = Unity

   (1) (D) Average Propensity to Consume (APC) = Unity (1)

   ›Reveal solutionSolution

   At break-even income, consumption exactly equals income (saving is zero), which means the entire income is consumed — so APC = 1.

   The break-even point in consumption theory is the level of income at which a household or economy consumes exactly what it earns. There is no saving and no dissaving; the consumption function intersects the 45° line (where $C = Y$).

   To see which statement holds at this point, recall what break-even means algebraically. If income is $Y$ and consumption is $C$, then at break-even:

   $C = Y$

   Since saving $S = Y - C$, we have:

   $S = Y - Y = 0$

   Now examine each option in turn.

   Option (A): Slope of Consumption Curve = Slope of Saving Curve

   The slope of the consumption curve is the marginal propensity to consume, $\text{MPC} = \frac{dC}{dY}$. The slope of the saving curve is the marginal propensity to save, $\text{MPS} = \frac{dS}{dY}$. We know that $\text{MPC} + \text{MPS} = 1$ always (since any additional rupee of income is either consumed or saved), so $\text{MPC} = \text{MPS}$ would require both to equal $0.5$. This is not a general property of the break-even point — it depends on the specific consumption function. The break-even condition tells us nothing about the slopes.

   Option (B): Average Propensity to Consume (APC) = Average Propensity to Save (APS)

   The average propensity to consume is $\text{APC} = \frac{C}{Y}$ and the average propensity to save is $\text{APS} = \frac{S}{Y}$. At break-even, $C = Y$ and $S = 0$, so:

   $\text{APC} = \frac{Y}{Y} = 1, \quad \text{APS} = \frac{0}{Y} = 0$

   These are not equal.

   Option (C): Slope of Saving Curve = Unity (1)

   The slope of the saving curve is $\text{MPS}$. There is no reason this must equal 1 at break-even. In fact, if $\text{MPS} = 1$, then $\text{MPC} = 0$, meaning no additional income is consumed — an extreme and unrealistic case. The break-even condition does not impose this.

   Option (D): Average Propensity to Consume (APC) = Unity (1)

   $\text{APC} = \frac{C}{Y}$

   At break-even, $C = Y$, so:

   $\text{APC} = \frac{Y}{Y} = 1$

   This is exactly what break-even means: the household consumes 100% of its income.

   Watch out

   Do not confuse APC with MPC. The marginal propensity to consume (the slope) can take any value between 0 and 1, but at break-even the average propensity to consume is always 1 because total consumption equals total income.

   ✓Final answer

   (D) Average Propensity to Consume (APC) = Unity (1) is true at the break-even level of income.

2. CBSE 2026Set 58/2/11 markMCQ
   Q.Choose the correct consumption function from the options given below with reference to the illustrated given diagram. (Diagram: X-axis = Income, Y-axis = Consumption; a 45° Income Line; a consumption curve C with a positive intercept of 100; equilibrium point E where the C curve cuts the 45° line; dashed lines mark C = 280 at one income level and C = 700 at income = 800.) Options : (A) C = 100 + 0.7Y (B) C = 100 + 0.8Y (C) C = 100 – 0.7Y (D) C = 100 – 0.8Y

   ›Reveal solutionSolution

   The consumption curve has autonomous consumption $\bar{C}=100$ (its vertical intercept) and its slope is the MPC. Using the break-even point $E$ where the curve cuts the $45°$ line ($C=Y=500$), the MPC works out to exactly $0.8$, so the consumption function is $C = 100 + 0.8Y$ — option (B).

   ---

   The consumption function and its components

   A consumption function describes the relationship between national income $Y$ and aggregate consumption $C$. The standard Keynesian form is

   $C = \bar{C} + c \, Y$

   where $\bar{C}$ is autonomous consumption (consumption when income is zero — the vertical intercept) and $c$ is the marginal propensity to consume (MPC), the fraction of each additional rupee of income spent on consumption, and geometrically the slope of the line.

   The diagram gives us two facts. First, the consumption curve has a positive vertical intercept of $100$, so $\bar{C} = 100$. Second, the curve is upward-sloping, which immediately rules out options (C) and (D): a negative coefficient would mean consumption falls as income rises, contradicting both theory and the diagram.

   ---

   Finding the MPC from the break-even point

   The cleanest way to read the slope off this diagram is the break-even point $E$, where the consumption curve intersects the $45°$ line. Along the $45°$ line every point satisfies $C = Y$, so at $E$ consumption exactly equals income. From the diagram, this occurs at $Y = C = 500$.

   Substituting $\bar{C} = 100$ and the point $(Y, C) = (500, 500)$ into $C = \bar{C} + cY$:

   $500 = 100 + c(500)$

   $400 = 500c$

   $c = \frac{400}{500} = 0.8$

   So the MPC is exactly $0.8$, giving the consumption function $C = 100 + 0.8Y$.

   ---

   Checking the options

   Option	Formula	Slope (MPC)	Verdict
   (A)	$C = 100 + 0.7Y$	$0.7$	Wrong slope
   (B)	$C = 100 + 0.8Y$	$0.8$	Correct
   (C)	$C = 100 - 0.7Y$	$-0.7$	Economically absurd
   (D)	$C = 100 - 0.8Y$	$-0.8$	Economically absurd

   Only option (B) has the correct intercept (100) and the correct slope (0.8) read from the break-even point, and it is the only positive-MPC option that fits.

   ✓Final answer

   Using the intercept $\bar{C}=100$ and the break-even point $E$ where $C = Y = 500$, the MPC is $\dfrac{500-100}{500} = 0.8$. The correct consumption function is (B) $C = 100 + 0.8Y$.

3. CBSE 2026Set 58/2/11 markMCQ
   Q.The Aggregate Demand (AD) curve lies parallel to consumption curve, indicating that both have ________. (Choose the correct option to fill in the blank) (A) same components (B) different slope (C) same slope (D) inverse relationship

   ›Reveal solutionSolution

   The Aggregate Demand (AD) curve is derived by vertically shifting the consumption curve upwards by the amount of autonomous expenditures; since these additions are independent of income, the slope of the AD curve remains the same as the slope of the consumption curve, which is the Marginal Propensity to Consume (MPC).

   To understand why the Aggregate Demand (AD) curve lies parallel to the consumption curve, we need to examine the components and slopes of both.

   First, let's consider the consumption function. In Keynesian economics, the consumption function describes the relationship between consumption expenditure and disposable income. It is typically represented as:

   $C = \bar{C} + bY$

   where:

   • $C$ is total consumption expenditure.
   • $\bar{C}$ is autonomous consumption (consumption that occurs even when income is zero).
   • $b$ is the Marginal Propensity to Consume (MPC), which is the change in consumption for a unit change in income ($\Delta C / \Delta Y$).
   • $Y$ is disposable income.

   The slope of the consumption curve is given by $b$, the Marginal Propensity to Consume. This value indicates how much of an additional rupee of income is spent on consumption.

   Next, let's look at the Aggregate Demand (AD) function. Aggregate Demand represents the total demand for goods and services in an economy at a given price level. In a simple two-sector economy (households and firms), AD is the sum of consumption (C) and investment (I):

   $AD = C + I$

   Substituting the consumption function into the AD equation:

   $AD = (\bar{C} + bY) + I$

   In this simplified model, investment ($I$) is often assumed to be autonomous, meaning it does not depend on the level of income. It is determined by factors like interest rates, business expectations, and government policy. Therefore, $I$ is a constant value.

   We can rearrange the AD function as:

   $AD = (\bar{C} + I) + bY$

   The Aggregate Demand function in a simple two-sector economy is given by:

   $AD = (\bar{C} + I) + bY$

   Here, $(\bar{C} + I)$ represents the total autonomous expenditure in the economy (the sum of autonomous consumption and autonomous investment). This is the intercept of the AD curve on the vertical axis. The term $bY$ represents the induced expenditure, which depends on income.

   Now, let's compare the slopes:

   • The slope of the consumption curve is $b$ (MPC).
   • The slope of the Aggregate Demand curve is also $b$ (MPC), as it is the coefficient of $Y$.

   Since the AD curve is formed by adding a constant autonomous component (investment, and potentially government spending and net exports in more complex models) to the consumption function, it essentially shifts the consumption curve upwards by that constant amount. A vertical shift by a constant amount does not change the slope of the curve. Therefore, both the consumption curve and the AD curve have the same slope, which is the Marginal Propensity to Consume ($b$). Curves with the same slope are parallel.

   ✓Final answer

   The Aggregate Demand (AD) curve lies parallel to the consumption curve, indicating that both have (C) same slope.

4. CBSE 2026Set 58/3/11 markMCQ
   Q.Select the correct formula to calculate the value of Marginal Propensity to Save (MPS) : I. Change in Savings (ΔS) / Change in Consumption (ΔC) II. Change in Savings (ΔS) / Change in Income (ΔY) III. 1 – Marginal Propensity to Consume (MPC) IV. Change in Income (ΔY) / Change in Savings (ΔS) Options : (A) I, II, III and IV (B) II and III (C) Only III (D) Only II

   ›Reveal solutionSolution

   MPS measures the fraction of additional income that households save rather than consume. The correct formulas are II (ΔS/ΔY, the definition) and III (1 – MPC, from the income identity), so the answer is (B).

   The Marginal Propensity to Save captures a simple behavioral question: when your income rises by one rupee, how much of that extra rupee do you tuck away as savings? It's the savings counterpart to the Marginal Propensity to Consume.

   Start with the fundamental income identity. Every rupee of additional income must be either consumed or saved—there is no third bucket. Mathematically, for any change in income:

   $\Delta Y = \Delta C + \Delta S$

   Divide both sides by $\Delta Y$:

   $\frac{\Delta Y}{\Delta Y} = \frac{\Delta C}{\Delta Y} + \frac{\Delta S}{\Delta Y}$

   $1 = \text{MPC} + \text{MPS}$

   This tells us immediately that MPS = 1 – MPC (option III is correct). If households consume 0.75 of each additional rupee, they must save the remaining 0.25; the two propensities are complementary fractions of the same whole.

   $\text{MPS} = \frac{\Delta S}{\Delta Y} = 1 - \text{MPC}$

   Now examine the definition. MPS is the responsiveness of savings to income, so by definition it is the ratio of the change in savings to the change in income that caused it: ΔS/ΔY (option II is correct). This is the direct, textbook definition—just as MPC is ΔC/ΔY, MPS is ΔS/ΔY.

   What about option I, ΔS/ΔC? This ratio tells you how much savings change relative to consumption change, but it is not MPS. It conflates two dependent variables (both S and C respond to Y) without anchoring to the independent variable, income. In fact, from the identity ΔY = ΔC + ΔS, you can show that ΔS/ΔC = (1 – MPC)/MPC = MPS/MPC, which is the ratio of the two propensities, not MPS itself.

   Watch out

   Do not confuse ΔS/ΔC (the ratio of two responses) with ΔS/ΔY (the marginal propensity). MPS always measures the response of savings to income, not to consumption.

   Option IV, ΔY/ΔS, is simply the reciprocal of the correct definition—it tells you how much income must change to generate one unit of savings change, which is the inverse of MPS (the savings multiplier's denominator), not MPS itself.

   Only formulas II and III correctly define or derive the Marginal Propensity to Save.

   ✓Final answer

   The correct formulas for MPS are II (ΔS/ΔY, the definition) and III (1 – MPC, from the income identity). The answer is (B).

5. CBSE 2026Set 58/3/11 markMCQ
   Q.Read the following statements carefully : Statement I : At the break-even level of income, the value of slope of the consumption curve is zero. Statement II : Marginal Propensity to Consume (MPC) refers to the change in consumption per unit change in income. In the light of the given statements, choose the correct option from the following : (A) Statement I is true and Statement II is false. (B) Statement I is false and Statement II is true. (C) Both Statements I and II are true. (D) Both Statements I and II are false.

   ›Reveal solutionSolution

   Statement I is false because the slope of the consumption curve at break-even income is the MPC, which is positive (not zero). Statement II is true because MPC is defined as the change in consumption per unit change in income.

   Let’s unpack this carefully. The question tests two distinct ideas from the theory of consumption and income determination — the break-even point and the meaning of Marginal Propensity to Consume (MPC).

   Statement I talks about the break-even level of income. In macroeconomics, the break-even point is that level of income where consumption exactly equals income — so saving is zero. At this point, the consumption curve (which plots consumption against income) is not flat; it has a positive slope. Why? Because the consumption function is typically written as $C = \bar{C} + bY$, where $\bar{C}$ is autonomous consumption (positive even at zero income) and $b$ is the MPC — the slope of the curve. At break-even, $C = Y$, so $\bar{C} + bY = Y$, which gives $Y = \bar{C} / (1-b)$. The slope here is still $b$, which is a positive fraction (between 0 and 1). It is never zero unless MPC is zero, which would mean consumption never changes with income — a situation that contradicts the basic Keynesian consumption function. So Statement I is false.

   Note

   A common confusion: students sometimes think “break-even” means the curve is horizontal. But break-even is about the level of income where C = Y, not about the slope. The slope remains the MPC throughout.

   Statement II is the textbook definition of Marginal Propensity to Consume. As NCERT states clearly, MPC is the ratio of change in consumption to change in income — that is, $\Delta C / \Delta Y$. It tells us how much of an extra rupee of income is spent on consumption. This is exactly what the statement says: “change in consumption per unit change in income.” So Statement II is true.

   Important

   The slope of the consumption curve is always the MPC, which is positive and less than 1 in the standard Keynesian model. At break-even income, the slope is not zero — it is the same positive MPC as at any other income level.

   Therefore, the correct option is (B): Statement I is false and Statement II is true.

   ✓Final answer

   In short, Statement I is false because the slope of the consumption curve at break-even income is the MPC (positive), not zero; Statement II is true as it correctly defines MPC. Hence, option (B) is correct.

6. CBSE 2026Set MARCH1 markMCQ
   Q.Rate of change in savings as income increases is

   (a) Average propensity to consume

   (b) Average propensity to save

   (c) Marginal propensity to save

   (d) Marginal propensity to consume

   ›Reveal solutionSolution

   The rate of change in saving as income changes is the marginal propensity to save, so the answer is (c).

   ✓Final answer

   Correct option: (c) Marginal propensity to save.

   Reasoning:

   • Marginal Propensity to Save (MPS) = $\frac{\Delta S}{\Delta Y}$ = change in saving ÷ change in income — exactly "rate of change in savings as income increases."
   • Marginal Propensity to Consume (d) = $\frac{\Delta C}{\Delta Y}$ — the change in consumption per unit change in income.
   • Average Propensity to Consume (a) = C ÷ Y, and Average Propensity to Save (b) = S ÷ Y — these are ratios of totals, not of changes.
   • Since MPC + MPS = 1, the correct "change" concept for saving is (c) — a key relationship in income-and-employment determination in Kerala Plus Two (DHSE) economics.
7. CBSE 2026Set ANNUAL1 markMCQ
   Q.The consumer does not change his consumption despite change in his income, than the value of MPC will be A) MPC > 1 B) MPC = 1 C) MPC = 0 D) MPC < 1

   ›Reveal solutionSolution

   No change in consumption when income changes means MPC = 0, so the answer is C.

   Marginal Propensity to Consume (MPC) = change in consumption (ΔC) ÷ change in income (ΔY). The question states the consumer does not change consumption despite a change in income, so ΔC = 0. Therefore MPC = 0 ÷ ΔY = 0. Values like MPC > 1 or MPC = 1 would mean consumption rises as much as, or more than, income, which contradicts the given situation.

   ✓Final answer

   C) MPC = 0

8. CBSE 2026Set ANNUAL1 markMCQ
   Q.Formula of consumption function is A) C = C̄ − cY B) C = C̄ + cY C) C = S̄ − cY D) C = S̄ + cY

   ›Reveal solutionSolution

   The consumption function is C = C̄ + cY, so the answer is B.

   In the Keynesian consumption function, C̄ is autonomous consumption (the consumption that takes place even at zero income) and c is the marginal propensity to consume, so cY is the induced consumption that rises with income Y. Consumption therefore increases with income: C = C̄ + cY. Options using a minus sign or the savings term S̄ do not represent the standard consumption function.

   ✓Final answer

   B) C = C̄ + cY

9. CBSE 2026Set ANNUAL1 mark
   Q.Define the average propensity to consume.

   ›Reveal solutionSolution

   APC is total consumption divided by total income: APC = C/Y.

   The Average Propensity to Consume (APC) measures the proportion of total income that households spend on consumption. It is defined as APC = C ÷ Y, where C is total consumption expenditure and Y is total (disposable) income. For example, if income is ₹1,000 and consumption is ₹800, then APC = 800 ÷ 1,000 = 0.8, meaning 80% of income is consumed. This is a standard definition in the Class-12 Determination of Income and Employment chapter.

   ✓Final answer

   Average Propensity to Consume (APC) = Total Consumption ÷ Total Income (C/Y); it is the fraction of total income devoted to consumption.

10. CBSE 2026Set ANNUAL1 mark
    Q.Find the value of MPS, if the MPC = 0.75.

    ›Reveal solutionSolution

    MPS = 1 − MPC = 1 − 0.75 = 0.25.

    Any additional unit of income is either consumed or saved, so the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) always add up to 1: MPC + MPS = 1. Given MPC = 0.75:

    Step	Working
    Relation	MPC + MPS = 1
    Rearrange	MPS = 1 − MPC
    Substitute	MPS = 1 − 0.75
    Result	MPS = 0.25

    ✓Final answer

    MPS = 1 − 0.75 = 0.25

11. CBSE 2026Set ANNUAL1 markMCQ
    Q.The consumption function curve is

    (a) Upward sloping

    (b) Downward sloping

    (c) Parallel to the x-axis

    (d) Parallel to the y-axis

    ›Reveal solutionSolution

    The consumption function curve is upward sloping, so the answer is (a).

    The consumption function (C = a + bY) shows that as income (Y) increases, consumption (C) also increases, because the Marginal Propensity to Consume (the slope b) is positive. When consumption is plotted on the vertical axis against income on the horizontal axis, the curve therefore rises from left to right — it is upward sloping, starting from a positive intercept (autonomous consumption).

    ✓Final answer

    Option (a) Upward sloping.

12. CBSE 2026Set ANNUAL1 mark
    Q.Write the answer in one sentence: What is marginal propensity to save?

    ›Reveal solutionSolution

    MPS = ΔS / ΔY — the fraction of additional income that is saved.

    The marginal propensity to save (MPS) is the ratio of the change in saving to the change in income: MPS = ΔS / ΔY. It shows the part of an additional unit of income that is saved. Its value lies between 0 and 1, and since extra income is either consumed or saved, MPS = 1 − MPC. The MPS also determines the multiplier, k = 1/MPS.

    ✓Final answer

    MPS = ΔS / ΔY — the fraction of additional income that is saved (MPS = 1 − MPC).