Read the following statements carefully : Statement 1 : Savings function can be derived from Consumption funct

Question 49 of 104

Q. Read the following statements carefully : Statement 1 : Savings function can be derived from Consumption function. Statement 2 : Consumption curve must always start from the point of origin. In light of the given statements, choose the correct alternative from the following : (A) Statement 1 is true and Statement 2 is false. (B) Statement 1 is false and Statement 2 is true. (C) Both Statements 1 and 2 are true. (D) Both Statements 1 and 2 are false.

Himachal HpboseCBSE Class XII Board 2023MCQ· 1mImportance★★★★★

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Concept understanding — Marginal Propensity to Consume

Marginal Propensity to Consume (MPC)

Start with everyday intuition

Think about what happens when you get some extra money — say, a ₹500 bonus from your part-time job, or a cash gift on your birthday. You don't save all of it, and you don't spend all of it either. Most people spend a part and save the rest. That part you spend — the fraction of the extra income that goes into consumption — is exactly what economists call the Marginal Propensity to Consume.

The word "marginal" here means "extra" or "additional." So MPC answers one simple question: Out of every extra rupee you earn, how much do you spend?

The precise meaning

Formally, MPC is the ratio of change in consumption expenditure to the change in income that brought it about.

MPC = \frac{\Delta C}{\Delta Y}

For example, if your income rises by ₹1,000 and your consumption rises by ₹750, your MPC is $750/1000 = 0.75$ (or 75%). This means you spend 75 paise of every extra rupee and save the remaining 25 paise.

The other side of the coin is the Marginal Propensity to Save (MPS) — the fraction of extra income that is saved. Since every extra rupee is either spent or saved:

MPC + MPS = 1

This is not a theory; it's an accounting identity. If MPC = 0.75, then MPS must be 0.25.

Why MPC matters

MPC is not just a number — it is the engine of the multiplier effect, one of the most powerful ideas in macroeconomics.

When someone spends money, that spending becomes someone else's income. That second person, in turn, spends a fraction (their MPC) of that income, which becomes a third person's income, and so on. A single initial injection of spending — say, government investment in a road — ripples through the economy, generating total income many times larger than the original spending.

The size of this ripple depends directly on MPC. The higher the MPC, the larger the multiplier.

Multiplier\ (k) = \frac{1}{1 - MPC} = \frac{1}{MPS}

If MPC = 0.8, the multiplier is $1/(1-0.8) = 5$ . An initial ₹100 crore investment can generate ₹500 crore of total income. If MPC = 0.5, the multiplier is only 2.

A word on the diagram …

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Statement 1 is true because savings is simply income minus consumption, so the savings function is directly derived from the consumption function. Statement 2 is false because the consumption curve starts from the vertical axis above the origin, reflecting autonomous consumption even at zero income.

Let’s unpack these two statements carefully, because they test a fundamental relationship in macroeconomics — the link between consumption and savings.

Statement 1: Savings function can be derived from Consumption function.

This is absolutely correct. In the Keynesian framework, income ( $Y$ ) is either consumed ( $C$ ) or saved ( $S$ ). So by definition:

$S = Y - C$

If you know the consumption function — typically written as $C = \bar{C} + bY$ , where $\bar{C}$ is autonomous consumption and $b$ is the marginal propensity to consume — then the savings function follows directly:

$S = Y - (\bar{C} + bY) = -\bar{C} + (1-b)Y$

Here, $-\bar{C}$ is autonomous saving (negative, because at zero income you dissave), and $(1-b)$ is the marginal propensity to save. So yes, the savings function is a mirror image of the consumption function. This relationship is a standard result in the theory of aggregate demand.

Note

A common confusion: the savings function is derived from the consumption function, not the other way around. Consumption is the primary behavioural relation; savings is the residual.

Statement 2: Consumption curve must always start from the point of origin. …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

HPBOSE Himachal Plus Two Class 12 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. Formula to calculate marginal propensity to consume (MPC) is:$
(a) MPC = ΔC/ΔY
(b) MPC = C/Y
(c) MPC = S/Y
(d) MPC = f(Y)
›Reveal solutionSolution

The correct option is (a) MPC = ΔC/ΔY.

The Marginal Propensity to Consume (MPC) is the proportion of an additional unit of income that is spent on consumption: MPC = change in consumption ÷ change in income = ΔC/ΔY. Its value lies between 0 and 1, and MPC + MPS = 1. …

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CA Foundation 2025Set may-20251 markMCQ
$Q. Under the Keynesian theory of determination of national income, the assumption is that the consumption increases with an increase in disposable income but the increase in consumption will be _______ the increase in disposable income. (A) Equal to (B) Opposite to (C) Greater than (D) Less than$
›Reveal solutionSolution

By Keynes's fundamental psychological law, a rise in income raises consumption by less than the rise in income.

Step 1 — Keynes's psychological law of consumption

Keynes held that as disposable income increases, consumption increases too, but not by the full amount of the increase — people save a part of the additional income.

Step 2 — Express with MPC

The marginal propensity to consume measures the share of extra income that is consumed:
$MPC = \frac{\Delta C}{\Delta Y}, \qquad 0 < MPC < 1$
Since $MPC < 1$ , the change in consumption $\Delta C$ is less than the change in disposable income $\Delta Y$ . …
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CA Foundation 2025Set may-20251 markMCQ
$Q. Which of the following is true in respect of relation of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) as per the Keynesian theory of determination of National Income ? (A) MPC = MPS (B) MPC + MPS = 1 (C) MPC + MPS = 0 (D) No relation exists between MPC and MPS$
›Reveal solutionSolution

Because extra income is either spent or saved, MPC + MPS = 1.

Step 1 — Split additional income

A change in disposable income ( $\Delta Y$ ) is divided between a change in consumption ( $\Delta C$ ) and a change in saving ( $\Delta S$ ):
$\Delta Y = \Delta C + \Delta S$
Step 2 — Divide through by $\Delta Y$
$\frac{\Delta C}{\Delta Y} + \frac{\Delta S}{\Delta Y} = 1 \;\Rightarrow\; MPC + MPS = 1$
So the two marginal propensities always sum to one, and MPS = 1 − MPC.

Why the other options are wrong: (A) MPC = MPS only in the special case where each equals 0.5; it is not a general rule. (C) MPC + MPS = 0 is impossible, since both are non-negative and their sum is 1. (D) A definite relation clearly exists, so 'no relation' is wrong. …
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HPBOSE Himachal Plus Two Class 12 (Commerce) 2025Set ANNUAL1 markMCQ
$Q. Average Propensity to Consume (APC) is equal to:$
(a) y/c
(b) Δy/Δc
(c) c/y
(d) Δc/Δy
›Reveal solutionSolution

The correct option is (c) c/y.

The Average Propensity to Consume (APC) is the proportion of total income that is spent on consumption: APC = total consumption ÷ total income = C/Y. (In contrast, the marginal propensity …

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HPBOSE Himachal Plus Two Class 12 (Commerce) 2024Set ANNUAL1 markMCQ
$Q. What is the formula of Marginal Propensity to save?$
(a) ΔY/ΔS
(b) ΔS/ΔY
(c) S/Y
(d) Y/S
›Reveal solutionSolution

The correct option is (b) ΔS/ΔY.

The Marginal Propensity to Save (MPS) is the proportion of an additional unit of income that is saved. It is calculated as MPS = change in saving ÷ change in income = ΔS/ΔY. Its value lie …

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