The Consumption and Savings Functions Learning Objectives

Within the goods market model, the role of consumption and savings is important. The consumption function explains how consumption expenditures depend upon the level of income. A linear specification of the consumption function is demonstrated here and, there are two parameters that may be selected to examine how the function is affected. The two parameters are the intercept, called autonomous consumption (Ca), and the slope, defined as the marginal propensity to consume (MPC) . The consumption function specifies that consumption (C) is a function of income (Y) and appears in the form: C = Ca + MPC * Y The savings functions is shown to depend upon the consumption function. Since Y=C+S, the savings function can be shown to equal: S=-Ca+MPS*Y where MPS = marginal propensity to save. It is assumed that there are no taxes (T=0). Please select values of autonomous consumption (Ca) and the marginal propensity to consume (MPC) and, click on the rectangular button to view the graphical illustration depicting these values for the consumption function, along with some descriptive narrative.

Linear Consumption Function Parameters Autonomous Consumption (Ca) 0 5 10 15 20 25 30 35 40 45 50 60 70 80 90 100 Marginal Propensity to Consume (MPC) .5 .55 .6 .625 .65 .675 .7 .725 .75 .775 .8 .825 .85 .9 .91 .92 .93 .94 .95 .96 .97 .98 .99 Please press to see the results