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Question

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.
1271223_1424589_ans_8abd197c4d044477989c4321ffd84500.png

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