Matching Economic Concepts: MPC, MPS, APC, and APS

This question requires us to match common macroeconomic ratios from List-I with their corresponding terms in List-II. These ratios relate changes or levels of consumption (C) and saving (S) to changes or levels of income (Y).

Let's break down each ratio and its corresponding economic term:

• Marginal Propensity to Consume (MPC): This measures how much consumption changes when income changes. It is calculated as the ratio of the change in consumption (\(\Delta C\)) to the change in income (\(\Delta Y\)).
• Marginal Propensity to Save (MPS): This measures how much saving changes when income changes. It is calculated as the ratio of the change in saving (\(\Delta S\)) to the change in income (\(\Delta Y\)).
• Average Propensity to Consume (APC): This measures the proportion of total income that is spent on consumption. It is calculated as the ratio of total consumption (C) to total income (Y).
• Average Propensity to Save (APS): This measures the proportion of total income that is saved. It is calculated as the ratio of total saving (S) to total income (Y).

Now, let's look at the ratios provided in List-I and match them with the terms in List-II based on these definitions:

List-I

• (A) \(\Delta C/\Delta Y\)
• (B) \(S/Y\)
• (C) \(\Delta S/\Delta Y\)
• (D) \(C/Y\)

List-II

• (I) APS
• (II) MPS
• (III) APC
• (IV) MPC

Step-by-Step Matching

1. (A) \(\Delta C/\Delta Y\): This ratio represents the change in consumption divided by the change in income. According to our definitions, this is the Marginal Propensity to Consume (MPC). So, (A) matches with (IV).
2. (B) \(S/Y\): This ratio represents total saving divided by total income. According to our definitions, this is the Average Propensity to Save (APS). So, (B) matches with (I).
3. (C) \(\Delta S/\Delta Y\): This ratio represents the change in saving divided by the change in income. According to our definitions, this is the Marginal Propensity to Save (MPS). So, (C) matches with (II).
4. (D) \(C/Y\): This ratio represents total consumption divided by total income. According to our definitions, this is the Average Propensity to Consume (APC). So, (D) matches with (III).

Based on the matching process, the correct pairs are:

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

Let's present this in a table format for clarity.

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

Revision Table: Propensities to Consume and Save

Additional Information: Relationships Between Propensities

It's important to understand the relationships between these propensities:

• Since income (Y) can either be consumed (C) or saved (S), we have \(Y = C + S\).
• Dividing the income identity by Y gives \(Y/Y = C/Y + S/Y\), which simplifies to \(1 = APC + APS\). This means the average propensity to consume and the average propensity to save always sum up to 1 for any given income level.
• Similarly, for a change in income (\(\Delta Y\)), the change in income must equal the change in consumption plus the change in saving: \(\Delta Y = \Delta C + \Delta S\).
• Dividing the change in income identity by \(\Delta Y\) gives \(\Delta Y/\Delta Y = \Delta C/\Delta Y + \Delta S/\Delta Y\), which simplifies to \(1 = MPC + MPS\). This means the marginal propensity to consume and the marginal propensity to save always sum up to 1.
• These relationships (\(APC + APS = 1\) and \(MPC + MPS = 1\)) are fundamental in understanding the consumption and saving functions in macroeconomics.
• MPC and MPS are typically constant or change slowly in simple macroeconomic models, while APC and APS change with the level of income. For example, as income rises, APC usually falls (people save a larger proportion of higher incomes), and consequently, APS rises.