Given Consumption curve, derive saving curve and state the steps taken in the process of derivation. Use diagram.
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Solution
In the diagram ¯C+bY is the consumption curve. The 45o line is the aggregate supply curve. At point A, consumption = income i.e (Y=C) ¯C represents the autonomous consumption i.e consumption at zero level of income. Steps for derivation of supply curve from consumption curve as follows. (i) Corresponding to ¯C in the consumption function we have -¯C in the saving function. That is, there are negative savings equal to autonomous consumption at Y=0. This is represented by Son the negative axis in the lower panel. (ii) At point B(Y=¯C). This implies that all the income is spent on consumption expenditure. Thus, savings equal to zero. This is shown as S=0 in lower panel. This point is also known as the Break-even point. (iii) Beyond the break-even point, by connecting points S and Y we derive the straight upward sloping saving curve. (iv) SS is the required saving curve.