Principles of Macroeconomics / Unit 9 MAC 0810 worked example, 60 to 90 seconds
Building Consumption and Saving Schedules
The idea
Take the course's household sector: autonomous consumption of 500 billion dollars and a marginal propensity to consume of 0.75. The consumption function is 500 plus 0.75 of disposable income. Saving at any income is disposable income minus consumption. Build the schedule by choosing income levels and computing both columns, then look for the level where saving turns from negative to positive.
In practice
At zero disposable income, consumption is 500 and saving is negative 500. At 1,000, consumption is 1,250 and saving is negative 250. At 2,000, consumption is 2,000 and saving is zero. At 3,000, consumption is 2,750 and saving is 250. At 4,000, consumption is 3,500 and saving is 500. The break-even income is 2,000, where the consumption function crosses the 45-degree line. Below it, households draw down; above it, they accumulate. Every 1,000 of extra income adds 750 to consumption and 250 to saving, which is the two propensities read straight off the table.
Where people slip
Check two things on any schedule like this one. The two columns must add to disposable income at every row, and the consumption column must rise by the same amount at every step if the propensity is constant. A row that fails either test is an arithmetic error, not a finding.
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