Income Determination Test - 24

Marginal Propensity to Consume (MPC) and the multiplier have a direct relationship because a higher MPC leads to a larger multiplier effect due to increased consumption spending.

Marginal Propensity to Save (MPS) and the multiplier have an inverse relationship as a higher MPS reduces the multiplier effect by directing more income towards saving rather than spending.

We know, APS=S/Y 

APC=C/Y. Also, Y=C+S, because income is either consumed or saved.

Now, C/Y+S/Y=C+S/Y=Y/Y=1

We know that, investment multiplier = (change in income) / (change in investment). We also know that investment multiplier = 1 / MPS. 

Aggregate demand represents the total demand for goods and services within an economy, comprising individual consumption, public consumption, and investment. Individual consumption reflects household spending, public consumption denotes government spending, and investment represents business spending on capital goods. Together, these components drive economic activity and growth by stimulating demand for products and services.

In a two sector economy, the aggregate demand (C+ I) refers to the total spending in the economy i.e. it is the sum of demand for the consumer goods (C) and investment goods (I) by households and firms respectively.

When consumption expenditure exceeds income, we have negative savings. Thus, APS being function of saving is negative.

APC=1-APS

APC=1-(-APS)

APC=1+APS

So, APC>1 when APS is negative.

The investment demand function is something that can change. It is simply the relationship between the interest rate and the amount of investment that is demanded. 

Autonomous consumption is independent of income. So, it takes place even when income is zero. 

APC refers to Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all level of income which can be more than one as long as consumption is more national income, i.e. before the break-even point, APC > 1.