Q.Read the following statements carefully : Statement 1 : If in an economy the level of income increases (ΔY), it will always proportionately increase the level of consumption (ΔC). Statement 2 : Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) are always equal to each other. In the 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.

The question asks us to evaluate two statements about consumption behavior and the relationship between MPC and MPS.

Statement 1 claims that an increase in income always leads to a proportionate increase in consumption. This is incorrect. When income rises by $\Delta Y$, consumption rises by $\Delta C = \text{MPC} \times \Delta Y$. The relationship is linear (assuming constant MPC), not proportionate. A proportionate increase would mean $\frac{\Delta C}{C} = \frac{\Delta Y}{Y}$, which is not what the consumption function describes. The MPC itself lies between 0 and 1, so the absolute increase in consumption is always less than the increase in income, and the relationship is additive, not proportionate.

Statement 2 claims that MPC and MPS are always equal to each other. This is false. The fundamental identity is:

$\text{MPC} + \text{MPS} = 1$ …

The question tests two fundamental concepts in Keynesian consumption theory: how consumption responds to income changes, and the relationship between the marginal propensities to consume and save.

Statement 1: Does income increase consumption proportionately?

The statement claims that when income rises by $\Delta Y$, consumption rises proportionately by $\Delta C$. This misunderstands what the Marginal Propensity to Consume actually measures.

The MPC is defined as the fraction of additional income that households devote to consumption:

Because the MPC lies strictly between 0 and 1 (households consume part of additional income and save the rest), the change in consumption is always less than the change in income in absolute terms. For instance, if MPC = 0.8 and income rises by ₹100, consumption rises by ₹80—not by ₹100.

The word "proportionately" in Statement 1 is the trap. A proportionate increase would mean $\frac{\Delta C}{C} = \frac{\Delta Y}{Y}$, implying the consumption-to-income ratio stays constant. But the MPC tells us $\Delta C = \text{MPC} \times \Delta Y$, which is a constant fraction of the income change, not a proportionate relationship. The consumption function $C = a + bY$ (where $b$ is the MPC and $a$ is autonomous consumption) is linear, not proportional through the origin.

Statement 1 is false.

Statement 2: Are MPC and MPS equal?

The Marginal Propensity to Save is the fraction of additional income that households save:

Since any additional income must be either consumed or saved (by definition, $\Delta Y = \Delta C + \Delta S$), dividing through by $\Delta Y$ gives: …