### Graphing Exercise: Consumption and Saving Schedules

Although many other factors help to determine the amount of consumption and saving, disposable income is easily the most important.  Furthermore, any determinant of consumption must also be a determinant of saving:  By definition, any amount of disposable income that is not spent must be saved.  Likewise, any fraction of a change in disposable income that is not spent must be saved.  That is, C + S = DI and MPC + MPS = 1.

 Exploration: How are disposable income, consumption, and saving related?

The consumption schedule graphically illustrates the relationship between consumption and disposable income (Listed as C and Y, respectively, in the table.)  While the fraction of disposable income that is spent typically declines as income increases, it is usually assumed that consumers spend a constant fraction of any change in income.  That is, the consumption schedule is linear with a slope less than one.

The graph shows a typical consumption schedule and its corresponding saving schedule.  Initially, consumers are assumed to spend \$1250 when disposable income is zero (“autonomous consumption.”)  The MPC is set to .75, indicating that consumers spend 75% of any change in their disposable incomes (and save 25%).  Combined, these two imply that consumers will spend all of their disposable income when the latter is at \$5000, as shown in the graph.  At this level of income, saving must be zero.

To use the graph, click and drag the blue diamond to change the level of disposable income; the corresponding values for consumption and saving will be updated in the chart.  Drag any of the scroll buttons to change the values of the MPC, MPS, or autonomous consumption.

1. If the MPC is .75, by how much will consumption increase if disposable income increases by \$1000?  By how much will saving increase?