Question

State wheather the following statements are true or false. Give reasons for your answer.

(a) When investment multiplier is 1. The value of MPC is zero. 

(b) The value of average propensity to save can never be less than 1.

Answer 1

 (a) The statement is true. When the value of K = 1, MPC = 0

It is shown as K = 1/1–MPC

Given K = 1

K = 1/1– MPC

1 – MPC = 1

MPC = 1 – 1

= 0

Thus when investment multiplier is 1, the value of MPC is zero.

(b) The statement is false. The value of APS can be negative. It is shown as :

APC + APS = 1

APC = C/Y

if c = 1200 and Y = 1000

then APC = (1200/1000) = 1.2

1.2 + APS = 1

APS = – 0.2

The value of APS is generally less than 1.