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Ex Ante Consumption

If the consum...

Question

If the consumption function is C = bY, what will be the saving function denoted by S?

A

$S = - ¯ C + b Y$

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B

$S = (1 - b) Y$

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C

$S = - ¯ C + (1 + b) Y$

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D

$S = - b Y$

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Solution

The correct option is B
$S = (1 - b) Y$

Saving is residual income of households that is left after consumption.

That is, S = Y - C

Therefore, S = Y - (bY)

S = (1-b)Y

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