Which of the following statements is true in regards to saving and income?
- Savings may be positive when the levels of income are low in the economy.
- Savings are zero when consumption is equal to income earned.
- Savings are positive when consumption is less than income
- Saving is a positive function of income i.e. they share an inverse relationship with each other
Answer & explanation
Correct answer: option 2
The correct answer is Option 2: 2 and 3
Explanation:
- Statement 2 is correct because savings are zero when consumption equals income (i.e., all income is consumed, and nothing is saved).
- Statement 3 is also correct, as savings are positive when consumption is less than income (i.e., some income is left unspent and is saved).
Statement 1 is incorrect because savings are usually low or negative when income is low (as individuals tend to spend most or all of their income).
Statement 4 is incorrect because savings and income have a positive relationship, meaning as income increases, savings also tend to increase—not an inverse relationship.