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Consumption and Saving Schedule

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GDP=DI C S APC APS MPC MPS$370 $375 $ -5 1.01 - .01 0.75 0.25

390 390 0 1 .00 0.75 0.25

410 405 5 .99 .01 0.75 0.25

430 420 10 .98 .02 0.75 0.25

450 435 15 .97 .03 0.75 0.25

470 450 20 .96 .04 0.75 0.25

490 465 25 .95 .05 0.75 0.25

510 480 30 .94 .06 0.75 0.25

530 495 35 .93 .07 0.75 0.25

550 510 40 .93 .07 0.75 0.25

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APC and APS

APC: average propensity to consume: APS: average propensity to save APC = C / DI and APS = S / DI The % of total income that is consumed

(APC), and the % of total income that is saved (APS).

APC falls and APS rises as DI increases.

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MPC and MPS

MPC: marginal propensity to consume MPS: marginal propensity to save

MPC = ∆C / ∆DI and MPS = ∆S / ∆DI The % of any change in income that is consumed

(MPC) and the % of income that is saved (MPS) MPC + MPS = 1 --- (1)

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MPC and MPS are slopes:

The slope of the consumption schedule = MPC, the slope of the saving schedule = MPS.

Even when DI=0, C≠0.

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Consumption Schedule

45o

C

Dissaving

Saving

Income (Y)

C

DI

Break-Even Point (C=Y)

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Consumption Schedule

45o

C

Dissaving

Saving

Income (Y)

C

DI

Break-Even Point (C=Y)

Autonomous C (a)

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Saving Schedule

S

+

-

0DI

S

Break-Even point (S=0)

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Saving Schedule

S

+

-

DI

S

Break-Even point (S=0)

Autonomous C (-a)

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Determinants of Consumption and Saving The most important factor is income (DI): an

increase in DI will lead to an increase in C by (MPC.DI) and increase in S by (MPS.DI).

This will be a move along the C schedule and S schedule.

The same result apply when DI declines. DI is the only factor that leads to a move along

the lines.

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Non-income determinants:

Non-income factors will shift the C and S schedules.

1. Wealth: an increase in wealth will increase C and reduces S

(shift the C schedule upward, S schedule downward).

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This is the case since people save to accumulate wealth.

As wealth increases, no need to save as much as before.

This is called “wealth effect”.

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2. Expectations: about future prices and income level.

Expectations affect spending (C) and saving.

Expectations of an increase in price levelincrease in price level (or future income): increase C and reduce S today, C schedule shifts upward while S schedule shifts downward.

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3. Taxation: increase in taxes will shift both C and S schedules downward:

DI = C + S + T

While tax reduction will shift both upward (higher DI)

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4. Household Debt: borrowing money allow C to shifts upward, but if the debt is large, then C may shift downward.