MPC + MPS equals

The terms MPC and MPS are concepts from economics that describe how households make spending and saving decisions out of their income. Let's break these down for a better understanding:

• MPC (Marginal Propensity to Consume): This represents the portion of additional income that a household is likely to spend on consumption rather than saving. For example, if someone's income increases by $100 and they spend $80 of that increase, their MPC would be 0.8 (80/100).
• MPS (Marginal Propensity to Save): Conversely, this is the portion of additional income that a household is likely to save rather than spend. Continuing the previous example, if the household saves $20 out of the $100 increase in income, their MPS would be 0.2 (20/100).

The sum of MPC and MPS must equal 1 because the additional income can only be spent or saved, meaning there aren’t any other alternatives for allocating this extra income. Therefore, mathematically, we express it as:

MPC + MPS = 1

In a closed economy model, the whole of any extra income is divided into consumption and saving, thereby making 1 the correct answer. So, whenever income changes, whatever portion is not spent (MPC) is saved (MPS), summing it up to one.