Lesson:Unit:

Keynes showed that Savings are a function of Y.

Not the rate of interest. If Y , then S . Savings is hoarding, money that is taken out of the Y-stream, and kept by the HH in the form of cash.

This is also called as Liquidity Preference.

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When Y is zero, consumption cannot be zero, consumers will have to borrow or use their past savings.

Therefore, when Y is zero, S < 0. This is called Dissavings.

As income increases, savings also increase.

Finally, S = 0, and then S > 0.

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C, S

0

Y

Y=C+S

S = - Sa + sY

Sa

Y1dissavin

gS < 0

S = 0 Savings > 0

Average Propensity to Save: APS = S/Y Savings function is given by: S = Sa + sY Here, Sa is the savings level when Y = 0,

and it is negative, and C > Y. When Y increases, C also increases but less

than Y, and C = Y. At this point S = 0. At higher incomes, S increases, but less

than income. So S/Y < 1, but positive.APC + APS = 1

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MPC = ∆S/ ∆Y = rate of increase in S, due to increase in Y.

S = - Sa + sY,MPS = dS/dY = s

It is equal to the slope of the S-curve. On a straight line S-curve, MPS remains

constant.MPC + MPS = 1, or

MPS = 1 - MPC

May 1, 20236

Y C S APC = C/Y

APS = S/Y

MPC = ∆C/∆Y

MPS = ∆S/∆Y

0 50 - 50

100 125 - 25

1.25 - 0.25 0.75 0.25

200 200 0 1 0 0.75 0.25300 275 25 0.92 0.08 0.75 0.25400 350 50 0.88 0.12 0.75 0.25500 425 75 0.85 0.15 0.75 0.25

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From the table it can be seen that:1.APC is > 1, when Y = 0, and falls as Y .2.APS is < 0, when Y = 0, and rises as Y .

But it is always < 1.3.APC + APS = 14.MPC is constant, since the C-function is a

straight line curve. MPC is the slope of the C-function.

5. MPS is also constant, since the S-function is a straight line. MPS is the slope of the S-function.

6.MPC + MPS = 1May 1, 2023

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