The Savings function

Keynesian Economics, concept of savings and hoarding, average and marginal propensity to save

1. Lesson:
Unit:

2. 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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3. 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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4. Apr 13, 2016
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C, S
0
Y
Y=C+S
S = - Sa + sY
Sa
Y
1dissaving
S < 0
S = 0 Savings > 0

5. 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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6. 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
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7. Y C S APC =
C/Y
APS =
S/Y
MPC =
∆C/∆Y
MPS =
∆S/∆Y
050- 50
100125- 251.25 - 0.25 0.75 0.25
2002000 1 0 0.75 0.25
30027525 0.92 0.08 0.75 0.25
40035050 0.88 0.12 0.75 0.25
50042575 0.85 0.15 0.75 0.25
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8. 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 = 1
4.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 = 1
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