If a consumption function of an economy is given as C = 250 + 0.4Y, then which of the following denotes the saving function of the economy?
Answer & explanation
Correct answer: option 4
The correct answer is option 4: S = -250 + 0.6Y
Relationship between consumption and saving: The total income (Y) of an economy is either consumed (C) or saved (S). Therefore, we have the equation:
Y = C + S
Substitute the consumption function: We are given the consumption function as C = 250 + 0.4Y.
Substituting this into the equation above, we get:
Y = (250 + 0.4Y) + S
Solve for saving: Rearranging the equation to isolate S, we get:
S = Y - (250 + 0.4Y)
S = Y - 250 - 0.4Y
S = -250 + 0.6Y
Therefore, the saving function of the economy is S = -250 + 0.6Y.