Question

Match List-I with List-II:

List-I	List-II
(A) Average propensity to save	(I) Inversely related to the investment multiplier
(B) Average propensity to consume	(II) Ratio of change in consumption to change in income
(C) Marginal propensity to save	(III) Always less than one
(D) Marginal propensity to consume	(IV) Can’t be zero

Choose the correct answer from the options given below:

• A. (A)-(I), (B)-(II), (C)-(III), (D)-(IV)
• B. (A)-(III), (B)-(IV), (C)-(I), (D)-(II)
• C. (A)-(I), (B)-(III), (C)-(IV), (D)-(II)
• D. (A)-(III), (B)-(II), (C)-(IV), (D)-(I)

Answer 1

The Correct Option is A

The task is to match items from List-I, which contain economic terms, with the appropriate descriptions from List-II. We will analyze each term and find its corresponding description.

• (A) Average propensity to save (APS): This refers to the proportion of total income that is saved rather than spent. It's inversely related to the investment multiplier (I), as saving reduces consumption and thus the multiplier effect.
• (B) Average propensity to consume (APC): This is the fraction of total income spent on consumption and is generally less than one. However, the term provided in List-II relates directly to the ratio of change in consumption to change in income, which is technically more aligned with the definition of marginal propensity to consume. Therefore, it matches with option (II).
• (C) Marginal propensity to save (MPS): This indicates the ratio of change in saving to the change in income and is always part of one with MPC, meaning eventually both can add up to one but individually each remains less than one. MPS is always less than one, thus matching with (III).
• (D) Marginal propensity to consume (MPC): This is the change in consumption due to a change in income and it cannot be zero as it always takes some value less than one, matching the description (IV) since some part of additional income is always consumed.

Conclusion: The correct matching is: (A)-(I), (B)-(II), (C)-(III), (D)-(IV).

Answer 2

APS (Average Propensity to Save) is inversely related to the investment multiplier. The investment multiplier depends on the MPC (Marginal Propensity to Consume) and MPS (Marginal Propensity to Save), where MPC + MPS = 1. A higher MPS leads to a smaller multiplier, while a higher MPC leads to a larger multiplier. Since APS is calculated as the ratio of savings to income (S/Y), and APS = 1 - MPC, a higher APS corresponds to a lower MPC, which results in a lower multiplier.

MPC cannot be zero because if it were zero, it would imply that no income is being consumed, which would mean that any additional income would not stimulate demand in the economy. This would render the multiplier effect ineffective, as no further economic activity would be generated from additional investment. Therefore, for the multiplier to have an effect and for the economy to be responsive to investment, MPC must always be greater than zero.