Question
Explain the components of saving function:$\text{S}=-\bar{}\text{C}+(1-\text{b})\text{Y}.$
✓
Answer
The saving function is:$\text{S}=\bar{}\text{C}+(1-\text{b})\text{Y}.$
Here, $-\bar{\text{C}}$ is called the intercept and it represents the amount of savings done when there is zero level of income. Savings is negative at zero level of income because at zero level of income, consumption (a) is positive. Negative savings is nothing but dissaving, this means that at zero level of income there is dissaving of amount-a.
Note: a can also be denoted by $-\bar{\text{C}},\text{i.e}.,-\text{a}-\bar{\text{C}}.$
The coefficient (1 - b) measures the slope of the savings function. The slope of the savings function gives the increase in savings to per unit increase in income. This is known as marginal propensity to save (MPS). Since b, i.e., MPC is less than one, it follows that (1 - b), i.e., MPS is positive. Savings is an increasing function of income. The given figure illustrates the idea.
Here, $-\bar{\text{C}}$ is called the intercept and it represents the amount of savings done when there is zero level of income. Savings is negative at zero level of income because at zero level of income, consumption (a) is positive. Negative savings is nothing but dissaving, this means that at zero level of income there is dissaving of amount-a.
Note: a can also be denoted by $-\bar{\text{C}},\text{i.e}.,-\text{a}-\bar{\text{C}}.$
The coefficient (1 - b) measures the slope of the savings function. The slope of the savings function gives the increase in savings to per unit increase in income. This is known as marginal propensity to save (MPS). Since b, i.e., MPC is less than one, it follows that (1 - b), i.e., MPS is positive. Savings is an increasing function of income. The given figure illustrates the idea.
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