Question

Assuming that the following functions are linear, give an economic interpretation of the slope of the function:

a) C(Y) is the total national consumption when national income is Y;

b) S(Y) is the total national savings when national income is Y.

Answer 1

The slope of the consumption function is MPC.It describes how much the consumers consume out of income.MPC=∆C/∆Y

Where can is consumption and Y is income.The value of MPC lies between 0 and 1.

The slope of national savings is called MPS.It describes how much consumers save out of income .MPS=∆S/∆Y

Where S is savings.MPS is also 1-MPC.

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