The correct option is 2 only
Explanation
In macroeconomics, disposable income is allocated solely between consumption and savings. The concepts of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) describe how households divide an additional unit of income between these two activities.
Statement 1 is Incorrect:
Any change in income ($\Delta Y$) results in a change in consumption ($\Delta C$) and a change in savings ($\Delta S$). Mathematically, $\Delta Y = \Delta C + \Delta S$. Dividing the entire equation by the change in income ($\Delta Y$) gives:
$1 = \frac{\Delta C}{\Delta Y} + \frac{\Delta S}{\Delta Y}$
Since MPC = $\frac{\Delta C}{\Delta Y}$ and MPS = $\frac{\Delta S}{\Delta Y}$, the sum of MPC and MPS is always equal to 1.
Statement 2 is Correct:
Because MPC + MPS = 1, the two variables share an inverse relationship. If the propensity to consume (MPC) increases, the remaining portion of income available for saving must necessarily decrease. Therefore, if MPC increases, MPS decreases.
Statement 3 is Incorrect:
MPC and MPS do not represent total levels of consumption or savings. They represent the ratio of change in consumption or savings with respect to a change in income. The total levels are absolute values, while the ratios of total consumption or savings to total income are known as the Average Propensity to Consume (APC) and Average Propensity to Save (APS).
Key Takeaway:
Every additional unit of income is either consumed or saved; therefore, the sum of the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS) is always unity (1).