Chapter 5: Problem 12

Which of the following relations is not correct? (LO1, 2) a) \(\mathrm{MPC}+\mathrm{MPS}=1\) d) \(1-\mathrm{APS}=\mathrm{APC}\) b) \(\mathrm{APC}+\mathrm{APS}=1\) e) \(1-\mathrm{MPC}=\mathrm{MPS}\) c) \(\mathrm{MPS}=\mathrm{MPC}+1\)

Short Answer

Expert verified

The incorrect relation is Relation C: \(\mathrm{MPS}=\mathrm{MPC}+1\).

Step by step solution

1. Analyze Relation A

Relation A is \(\mathrm{MPC}+\mathrm{MPS}=1\). This relation states that the sum of the Marginal Propensity to Consume and the Marginal Propensity to Save should equal 1. This is because, at any given level of income, an individual can only either consume or save the income. Therefore, this relation is correct.

2. Analyze Relation B

Relation B is \(\mathrm{APC}+\mathrm{APS}=1\). Similar to Relation A, this relation states that the sum of the Average Propensity to Consume and the Average Propensity to Save should equal 1. This is because the average propensity values also represent the fractions of income being consumed or saved. Therefore, this relation is also correct.

3. Analyze Relation C

Relation C is \(\mathrm{MPS}=\mathrm{MPC}+1\). This relation states that the Marginal Propensity to Save equals the Marginal Propensity to Consume plus 1. This is not correct, as it implies that the individual is saving more than the total income and not consuming anything, which is not possible. Therefore, this relation is incorrect.

4. Analyze Relation D

Relation D is \(1-\mathrm{APS}=\mathrm{APC}\). This relation states that the Average Propensity to Consume equals 1 minus the Average Propensity to Save. Since APC and APS should always add up to 1, this relation is correct.

5. Analyze Relation E

Relation E is \(1-\mathrm{MPC}=\mathrm{MPS}\). This relation states that the Marginal Propensity to Save equals 1 minus the Marginal Propensity to Consume. This is correct, as MPC and MPS should always add up to 1, given that they represent the division of income between consumption and savings. From the analysis above, the relation that is not correct is Relation C (\(\mathrm{MPS}=\mathrm{MPC}+1\)).