Understanding Saving in a Simple Keynesian Economy

Consider an economy in which autonomous consumption, planned investment, government expenditure, autonomous taxes, and the marginal propensity to consume are given by: Ca = 1400, Ip = 1800, G = 1950, Ta = 1750, c = 0.6. – (b) What is the level of saving when the level of income equals $10,000?

In macroeconomics, understanding the relationship between consumption, saving, and income is fundamental to analyzing the health and functioning of an economy. Let’s consider an economy where certain key parameters are provided: autonomous consumption (Ca), planned investment (Ip), government expenditure (G), autonomous taxes (Ta), and the marginal propensity to consume (c). Specifically, the parameters are as follows:

  • Autonomous consumption (Ca) = 1400
  • Planned investment (Ip) = 1800
  • Government expenditure (G) = 1950
  • Autonomous taxes (Ta) = 1750
  • Marginal propensity to consume (c) = 0.6

Given these parameters, we will determine the level of saving when the level of income equals $10,000.

Consumption Function

The consumption function in this context is given by the formula:
C = Ca + c*(Y – Ta) ]


  • ( C ) is the total consumption,
  • ( Y ) is the level of income,
  • ( Ca ) is autonomous consumption,
  • ( c ) is the marginal propensity to consume,
  • ( Ta ) is autonomous taxes.

Plugging in the given values:
C = 1400 + 0.6*(10000 – 1750)
C = 1400 + 0.6*8250
C = 1400 + 4950
C = 6350

Thus, when the level of income (Y) is $10,000, the total consumption (C) is $6,350.

Disposable Income

Disposable income (YD) is the income available to households after paying taxes. It is calculated as:
YD = Y – Ta
YD = 10000 – 1750
YD = 8250


Saving (S) is the portion of disposable income that is not consumed. It can be determined using the formula:
S = YD – C

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Substituting the values:
S = 8250 – 6350
S = 1900

Therefore, when the level of income equals $10,000, the level of saving in this economy is $1,900.


This analysis highlights the fundamental Keynesian insight into how consumption and saving are determined by the levels of income, autonomous spending, and the marginal propensity to consume. In this scenario:

  • Autonomous consumption of $1,400 reflects the baseline level of consumption regardless of income.
  • The marginal propensity to consume (0.6) indicates that households spend 60% of each additional dollar of disposable income on consumption.
  • Taxes reduce the disposable income available for consumption and saving.

When income is $10,000, after accounting for taxes, households have $8,250 in disposable income. They consume $6,350 of this income and save the remaining $1,900. This saving represents the unspent portion of income, contributing to the overall financial health and potential future investment in the economy.

Understanding these relationships helps policymakers design effective fiscal policies to influence overall economic activity, stimulate growth, and manage economic cycles. By adjusting parameters such as taxes or government spending, they can influence both consumption and saving behaviors, steering the economy toward desired outcomes.