Cambridge International as and a level Economics Ebook

consumption 
function
indicates how much will be spent at diff erent 
levels of income. It is given by the equation: 
C
=
a
+
bY
, 
Consumption: 
spending by households on goods 
and services.
Disposable income: 
income minus direct taxes plus 
state benefits.
KEY TERMS
Consumption function: 
the relationship between income 
and consumption.
KEY TERM
247
Chapter 9: The macroeconomy 

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where 
C
is consumption, 
a
is autonomous consumption 
(that is the amount spent even when income is zero and 
which does not vary with income), 
b
is the marginal 
propensity to consume and 
Y
is disposable income. 
bY
can 
also be defi ned as income-induced consumption because it 
is spending that is dependent on income. For example, 
if 
C
=
$100 
+
0.8
Y
and income is $1,000, the amount spent 
will be $100 
+
0.8
× 
£1,000 
=
$900.
Th
e 
saving function
is, in eff ect, the reverse of the 
consumption function and is given by the equation: 
S
=
–
a
+
sY
, where 
S
is saving, 
s
is the marginal propensity 
to save, 
Y
is income and 
a
is autonomous dissaving 
(i.e., how much of their savings people will draw on when 
their income is zero; this amount does not change as 
income changes). 
sY
is induced saving; that is, saving that 
is determined by the level of income. Th
e saving function 
can be used to work out how much and what proportion 
households will save at diff erent income levels. For 
example, if 
S
=
−
$200 
+
0.2
× 
$4,000 
=
$600.
Th
e