Concept explainers
Relationship between consumption and saving. To explain the motivation for saving.
Explanation of Solution
Consumption refers to the utilization of services and goods by households. Saving refers to the amount of leftover from the amount of disposable income received in each period after subtracting the consumption spending of an individual.
The income of an individual remains constant for a particular period. It can be either spent on consumption spending or can be saved. Thus, a rise in consumption spending lowers the income left for saving.
Hence, it can be concluded that consumption and saving are inversely related. This means that as the consumption increases, saving declines (as income stays the same) and when consumption decreases, saving rises.
Consumers are unaware of their income status in the future. Thus, for the bad days in the future, consumers prefer to save from the current income. This uncertainty towards the future motivates consumers to save.
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Chapter 4 Solutions
Macroeconomics
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Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning