If the autonomous consumption is given as 100 and the tendency of the people to increase consumption for an increase in income is only 20%, then derive the savings function.
Answer & explanation
Correct answer: option 1
The correct answer is Option 1: S = -100 + 0.8 Y
We all know that algebraically saving function is written as follows:
S = - c̅ + (1-b)Y
C = 100 + 0.2Y -> Given
(As autonomous consumption is given as 100 and MPC i.e. increased consumption for an increase in income is given 20%)
Therefore, according to the question, the savings function will be as follows:
S = (-) 100 + (1 - 0.2)Y
S = (-) 100 + (0.8)Y