3.

Consumption and Saving Functions

C DI = C

Consumption Function saving A

45 dissaving range saving + Saving Function saving range DI

0 dissaving range

A DI saving range

A: break-even level of income; DI=C, savings =0 Dissaving range: C>DI, saving <0, left of the break-even level of income Saving range: C<DI, saving<0, right of the break-even level of income On consumption function graph, distance between consumption function and 45 reference line equals savings. As DI , the percentage of DI saved

Consumption and saving function shift in opposite directions

C DI = C C2 C1

At a given level of DI if: - C then saving - C then savings Why? At a certain level of DI, if you consume more, you must save less.

45 DI saving + Saving1 Saving2

0 DI