The marginal propensity to consume is increasing if the marginal propensity to save is increasing
The correct answer and explanation is:
The statement is incorrect. The marginal propensity to consume (MPC) and the marginal propensity to save (MPS) are inversely related. This means that if one increases, the other decreases. The total of both is always equal to 1, because every additional unit of income is either consumed or saved.
To explain, the marginal propensity to consume refers to the portion of an additional amount of income that a consumer will spend on goods and services. The marginal propensity to save, on the other hand, refers to the portion of additional income that is saved rather than spent.
If the marginal propensity to save increases, it means individuals are saving more of each additional dollar of income. As a result, the marginal propensity to consume must decrease. For example, if a person saves 70% of any extra income, the MPC would be 30%. If the person decides to save only 60%, the MPC would increase to 40%.
The relationship is essential in understanding economic behavior, particularly in the context of consumption and saving decisions. Economists use this relationship to predict how changes in income or government policies like tax cuts will affect total spending in an economy. For instance, a higher MPC typically suggests more spending, which can stimulate economic activity, while a higher MPS suggests a preference for saving, which might slow down consumption and demand in the economy.
In short, if the marginal propensity to save increases, the marginal propensity to consume would decrease, not increase. This inverse relationship is fundamental to the economic concept of how households allocate additional income between consumption and saving.