Question

Which of the following is a psychological explanation as to why the MPC is always less than income?

• A. As income increases over time, consumption also increases, but at a slower rate as compared to that of income.
• B. People do not consume the entire part of the increase in their income.
• C. People wish to save a part of the increase in their income for future needs as saving a part of income for future reflects a sense of security.
• D. All of the above.

Answer 1

The correct option is C People wish to save a part of the increase in their income for future needs as saving a part of income for future reflects a sense of security.

The reason behind MPC being a fraction (less than one) of income is given in terms of psychological behaviour of the individuals taken together in the economy.
It is commonly observed that people do not consume the entire part of increase in their income. They, certainly increase the amount of consumption with increase income as they get a scope to increase their level of satisfaction. But, at the same time, they do wish to save a part of the increase in income for future needs. Saving a part of income for future reflects a sense of security which is psychological in nature.
So an increase in income is divided between increase in consumption and increase in saving.