Question

Distinguish between Consumption Function and Saving Function.

Answer 1

The following article will guide you to learn how national income determines consumption and saving functions.

Although national income accounting provides estimates of the nation’s output, it does not explain why the nation’s output is at a certain level or why it increases more rapidly in some years than in others.

In a simple Keynesian model aggregate demand — the sum of society’s expenditures on consumption and investment — determines the equilib­rium level of income. If aggregate demand changes, the equilibrium level of income also changes.

Answer 2

The difference between Consumption Function and Saving Function can be explained as follows:

Consumption Function:

According to the Keynes' Psychological Law of Consumption, with increase in income, consumption also increases but not exactly at the same level. Increase in consumption level will always be less the increase in income level.

Keynes' Consumption Function can be expressed in the following form:

C = C + MPC (Y)

where

C = Autonomus Consumption Expenditure

MPC = Mariginal Propensity to Consume.

Y = Income

Saving Function:

Saving function refers to the relationship between the savings and the level of the income. With increase in income, savings also increases as entire income is not being consumed.

Saving Function can be expressed in the following form:

S = -S + MPS (Y)

where

-S = Autonomus Saving

MPS = Mariginal Propensity to Save.

Y = Income

Learn more about Consumption function:

Question: Aims and objectives of psychological law of consumption

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Question: Keynes psychological law of consumption on the basis of survey of five family budget

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