In the simple Keynesian model, the greater is the marginal propensity to consume (MPC), the relationship between MPC and the marginal propensity to save (MPS) implies which of the following?

Introduction / Context:
Marginal propensity to consume (MPC) and marginal propensity to save (MPS) are two related concepts in Keynesian income determination theory. They describe how households divide each additional unit of income between consumption and saving. Because any change in income must either be consumed or saved, MPC and MPS are directly linked. This question asks how an increase in MPC affects MPS.

Given Data / Assumptions:

• We are considering a simple closed economy with no foreign trade and no complicated financial instruments.
• Households can allocate additional income only between consumption and saving.
• MPC is defined as change in consumption (delta C) divided by change in income (delta Y).
• MPS is defined as change in saving (delta S) divided by change in income (delta Y).
• For each unit of extra income, delta C plus delta S equals delta Y.

Concept / Approach:
The key relationship between MPC and MPS is MPC + MPS = 1. This arises because any additional rupee of income that a household receives is either spent on consumption or saved; there is no other use in this simple model. If the household chooses to spend a larger fraction of each extra rupee, then the fraction saved must fall. Therefore, when MPC increases, MPS must decrease by an equal amount, and when MPC decreases, MPS increases. This inverse relationship is central to multiplier analysis in macroeconomics.

Step-by-Step Solution:
Step 1: Write the basic identity for a change in income: delta Y = delta C + delta S.Step 2: Divide both sides by delta Y to obtain 1 = (delta C / delta Y) + (delta S / delta Y).Step 3: Recognise that delta C / delta Y is MPC and delta S / delta Y is MPS.Step 4: Conclude that MPC + MPS = 1 in this simple model.Step 5: If MPC increases, then to keep the sum equal to 1, MPS must decrease by the same amount, and vice versa.Step 6: Therefore, a greater MPC implies a smaller MPS.

Verification / Alternative check:
Consider a numerical example. Suppose that when income increases by 100 units, consumption increases by 80 units and saving increases by 20 units. Then MPC = 80 / 100 = 0.8 and MPS = 20 / 100 = 0.2, and their sum is 1. If households decide to spend more and now consume 90 units when income rises by 100 units, MPC becomes 0.9 and MPS becomes 0.1. The example shows that when MPC rises from 0.8 to 0.9, MPS falls from 0.2 to 0.1, confirming the inverse relationship.

Why Other Options Are Wrong:
The price level in the economy is determined by many factors, and it is not directly tied in a simple one to one way to MPC, so option a is incorrect. The average propensity to consume, option c, is a different concept based on total consumption and total income and does not necessarily move inversely with MPC. The market rate of interest, option d, depends on monetary conditions and saving and investment behaviour, not only on MPC. Option e links MPC directly to the budget deficit, but government finances depend on many factors and not just on private consumption behaviour.

Common Pitfalls:
Students sometimes confuse average and marginal propensities or forget the identity that MPC plus MPS equals 1. Others may try to link MPC directly to inflation, interest rates, or fiscal balances without considering the broader macroeconomic framework. To avoid these mistakes, it is helpful to focus on the basic allocation of each extra unit of income between consumption and saving and to remember that the two marginal propensities must sum to unity in the simple model.

Final Answer:
The greater is the marginal propensity to consume, the smaller is the marginal propensity to save.