Chapter 10, Problem 8QP

### Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

Chapter
Section

### Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

# Using the Keynesian consumption function, prove numerically that, as the MPC rises, saving declines.

To determine

The relation between the MPC and the savings.

Explanation

According to the Keynesian economists, the households have only two options before them. One is to save the income earned or two is to consume the income earned. There are no other choices for the consumers of the households. Thus, both the savings and consumption are directly related to the level of disposable income of the households. As the people consume, the difference between the disposable income and the level of consumption determines the level of savings. Thus, the savings can be written as follows:

Savings=Disposable incomeConsumptionS=YdCS=Yd[C0+(MPC×Yd)]

Thus, the savings decreases as the consumption increases, and vice versa. This can be proved mathematically by assigning different values to the equation. Let the value of the autonomous consumption be $1,000, the value of disposable income be$10,000. Different values for MPC can be given. When the value of MPC is 0.70, the level of savings in the economy can be calculated as follows:

S=10,000[1,000+(0

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