Keynes showed that savings (S) are determined by income (Y) rather than interest rates. When income is zero, consumption cannot be zero so consumers must borrow or use past savings, resulting in negative or "dissavings" (S<0). As income increases, both consumption (C) and savings increase, but savings increase at a lower rate. The average propensity to save (APS) represents savings (S) as a proportion of income (Y) and increases as income rises from dissaving to positive saving. The marginal propensity to save (MPS) represents the increase in savings from a small increase in income and remains constant as the savings function is a straight line.

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
Y1dissaving
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
0 50 - 50
100 125 - 25 1.25 - 0.25 0.75 0.25
200 200 0 1 0 0.75 0.25
300 275 25 0.92 0.08 0.75 0.25
400 350 50 0.88 0.12 0.75 0.25
500 425 75 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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