Question

Give reasons or explain:
With the increase in income, both consumption and savings increase.

Answer 1

In Keynesian consumption function, consumption is assumed to vary directly with income. Specifically, consumption is assumed to increase with income, with the increase in consumption being less than the increase in income. Thus, when income increases, consumption increases at a lesser proportion than the increase in income. Because of this as income increases, the savings also increases because, the part of income which is not consumed gets saved.

Thus with increase in income, both the consumption and savings increase.