Aggregate Demand and its components
The theory of income determination as given by John Maynard Keynes is based on the assumption that all the variables in the theory are Ex-ante. The theory of income determination is based on the analysis of Aggregate Demand and Aggregate Supply. The most important determinant of consumption demand is household income. A consumption function describes the relation between consumption and income. The simplest consumption function assumes that consumption changes at a constant rate as income changes. Even if income is zero, there is some consumption. This level of consumption is independent of income. There is another component of the consumption function which depends on the marginal propensity to consume (MPC) and hence is a dependent variable. While the average propensity to consume (APC) is the consumption per unit of income, the marginal propensity to consume is the rate of change in consumption due to income change.
The other part of the household income is savings. It is that part of the income which is not consumed. The average propensity to save (APS) is savings per unit of income. APS can be negative. It is when there is some consumption even at zero level of income or till that level of income, where consumption is greater than Income.
The maximum value of MPC can be:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 1
When income rises, a household can spend some, all or none of the extra income on consumption. The share it spends is the marginal propensity to consume, c = ΔC / ΔY. Since consumption cannot rise by more than the extra income, the maximum value of the MPC is 1, when the whole increase is consumed; at the other end MPC = 0, so the MPC lies between 0 and 1.
Why the other options are incorrect
Option (1) 0 — Incorrect. Zero is the lowest value the MPC can take, when none of the extra income is consumed.
Option (2) 2 — Incorrect. An MPC above 1 would mean consumption rising by more than income, which the definition rules out.
Option (4) Infinity (∞) — Incorrect. The change in consumption can never exceed the change in income, so the MPC cannot be infinite.
NCERT (2025-26): “4.1.1. Consumption … Now, let us look at the value that MPC can take. When income changes, change in consumption ( ∆C ) can never exceed the change in income ( ∆ Y) . The maximum value which c can take is 1. On the other hand consumer may choose not to change consumption even when income has changed. In this case MPC = 0. Generally, MPC lies between 0 and 1 (inclusive of both values).…” |