Consumption And Saving Functions

In economics, the concepts of marginal propensity to save (MPS) and average propensity to save (APS) play a crucial role in understanding how individuals allocate their income between saving and consumption. Let's clarify these concepts and explain why the given statement is incorrect:

1. Marginal Propensity to Save (MPS): This is the fraction of an additional unit of income that is saved rather than consumed. Its value ranges from 0 to 1, as some portion of additional income is either consumed or saved.
2. Average Propensity to Save (APS): This is the total savings to total income ratio. It tends to increase with an increase in income since a larger proportion of income can be allocated to savings as basic consumption needs are met.
3. Break-even Point: At this point, income and consumption levels are equal, meaning savings are zero.
4. Incorrect Statement Explanation: The statement "The sum of average propensity to save and marginal propensity to save is always equal to one" is incorrect. In reality, the sum of the average propensity to consume (APC) and APS can differ from one. What equals one is the sum of the marginal propensity to consume (MPC) and MPS, as income is either consumed or saved.

Thus, the assertion that the sum of APS and MPS always equals one is incorrect, making it the correct answer choice for the question.

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).