100. If there is a decrease in disposable income in an economy, then

A. both the APC and the APS rise.
B. the APC rises and the APS falls.
C. the APC falls and the APS rises.
D. both the APC and the APS fall.

Question

100. If there is a decrease in disposable income in an economy, then

A.  both the APC and the APS rise.
B.  the APC rises and the APS falls.
C. the APC falls and the APS rises.
D. both the APC and the APS fall.

BlackTom AI · Accepted Answer

Question restatement: If there is a decrease in disposable income in an economy, then

A. both the APC and the APS rise.
B. the APC rises and the APS falls.
C. the APC falls and the APS rises.
D. both the APC and the APS fall.

Option A: 'both the APC and the APS rise.' In the standard income–consumption framework, APC and APS are linked by the identity APC + APS = 1. If disposable income falls, it is not automatically true that both ratios rise; since they are complements, an increase in one implies a decrease in the other. This makes A implausible.

Option B: 'the APC rises and the APS falls.' This aligns with the basic identity APC + APS = 1. If disposable income decreases, savings as a proportion of income (APS) tends to shrink relative to the fall in income, while consumption as a proportion (APC) can rise if households cut spending less than proportionally to income. In many analyses, a drop in income causes the remaining income to be allocated more toward consumption relative to income, pushing APC up and APS down. This option is consistent with the complementarity relationship and how proportional changes respond to a drop in income.

Option C: 'the APC falls and the APS rises.' If APC falls, APS would rise to keep the sum at 1. However, with a decrease in disposable income, the typical behavioral response does not usually involve a larger saving proportion relative to income alongside lower consumption as a proportion. This contradicts the common interpretation of how APC and APS move when Yd declines.

Option D: 'both the APC and the APS fall.' Since APC + APS must equal 1, two simultaneous falls would imply their sum is less than 1, which is not possible within the standard framework. This makes D inconsistent with the basic accounting identity.

Summary reasoning: The key structural relationship is APC + APS = 1. A decrease in disposable income tends to push the ratio of consumption to income up (APC rises) while pushing the ratio of saving to income down (APS falls) because the remaining income is allocated more toward consumption relative to the reduced income level. Thus, option B correctly captures the expected directional change, while options A, C, and D misstate the relationships either due to violating the identity or mischaracterizing behavioral responses.

ECNM1115.32542.202530 Macroeconomics Spring 2025 Final

100. If there is a decrease in disposable income in an economy, then A. both the APC and the APS rise. B. the APC rises and the APS falls. C. the APC falls and the APS rises. D. both the APC and the APS fall.

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