Question

The structural model of an economy is given below, C=400+0.8Yd,. I=350,. G=450. ,. T=200

Derive the savings function?

Answer 1

$\bold {Answer}$

$S = -400+0.2Y_{d}$

$\bold {Solution}$

Savings is the excess of income not consumed. Income is either consumed or saved. Therefore, the sum of household consumption and savings should total disposable income. That is,

$C + S = Y_{d}$ Where C represents household consumption expenditure, S represents savings and Yd is the disposable income. Thus,

$C + S = Y_{d}$

$(400 + 0.8Y_{d}) + S = Y_{d}$

$=> 400+0.8Y_{d} + S = Y_{d}$

$=> S = -400 + Y_{d} - 0.8Y_{d}$

$=> S = -400 +(1-0.8)Y_{d}$

$=> \bold {S = -400 + 0.2Y_{d}}$