Linear equations for the consumption and saving schedules take the general form C = a + bY and S = – a + (1 – b)Y, where C, S, and Y are consumption, saving, and national income, respectively. The constant a represents the vertical intercept, and b represents the slope of the consumption schedule.
a. Use the following data to substitute numerical values for a and b in the consumption and saving equations.
b. What is the economic meaning of b? Of (1 – b)?
National Consumption
Income (Y) (C)
$ 0 ............ $ 80
100 ............ 140
200 ............ 200
300 ............ 260
400 ............ 320
c. Suppose that the amount of saving that occurs at each level of national income falls by $20 but that the values of b and (1 – b) remain unchanged. Restate the saving and consumption equations for the new numerical values, and cite a factor that might have caused the change.