Final answer:
The MPC and MPS always add up to 1, as they represent the proportion of extra income that is either spent or saved. Knowing the MPS allows you to calculate the MPC as it is simply 1 minus MPS. These values are foundational to the spending multiplier and consumption function in economics.
Step-by-step explanation:
The Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS) always add up to 1. This is because every additional unit of income that a person receives is either spent (consumed) or saved. For instance, if someone has an MPC of 0.9, they spend 90% of any additional income and consequently have an MPS of 0.1, meaning they save the remaining 10% of any extra income. The formula for finding the MPC when you have the MPS is MPC = 1 - MPS. For example, with an MPS of 30%, the calculation would be 1 - 0.3, giving an MPC of 0.7 or 70%. These proportions play a critical role in determining the spending multiplier, which is a key concept in economics that indicates how a change in one economic activity (like spending) affects the overall economy.
Another key concept related to the MPC is the consumption function, which describes how income levels impact consumption and saving. Even if income were zero, people still have some level of consumption. Therefore, the MPC and MPS help to model how additional income above this consumption affects spending and savings behavior. For example, if with every $1,000 increase in income, consumption goes up by $800 (MPC = 0.8), then saving would increase by $200 (MPS = 0.2). This relationship doesn't change no matter the income, guaranteeing that the sum of consumption and saving equals the total income.