Assertion (A): Other things remaining equal, a rise in the MPS lowers the equilibrium income of an economy.
Reason (R): The MPS is the change in savings per unit change in income.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): Other things remaining equal, a rise in the MPS lowers the equilibrium income of an economy. — True. A higher MPS is a lower MPC, so the AD line swings down and meets the 45° line at a lower income.
Reason (R): The MPS is the change in savings per unit change in income. — True. This is the definition of the MPS.
A is about the effect of a higher MPS on income. R is about what the MPS means.
Why R does not explain A? R only defines the MPS; it does not say how income changes. The real reason: with Y = A / (1 − c), a higher MPS means a smaller c, so the flatter AD line meets the 45° line at a lower income.
NCERT (2026-27): “Paradox of Thrift … When A changes the line shifts upwards or downwards in parallel. When c changes, however, the line swings up or down. An increase in mps, or a decline in mpc, reduces the slope of the AD line and it swings downwards. We depict the situation in Fig. 4.8.” “Some Definitions Marginal propensity to save (MPS): it is the change in savings per unit change in income. It is denoted by s and is equal to 1 − c. It implies that s + c = 1.” |