What are the variables (the items measured on the axes) in a...

What are the variables (the items measured on the axes) in a graph of the $(a)$ consumption schedule and $(b)$ saving schedule? Are the variables inversely (negatively) related or are they directly (positively) related? What is the fundamental reason that the levels of consumption and saving in the United States are each higher today than they were a decade ago?

Key Concepts

Economic Growth

The fundamental reason for higher levels of consumption and saving over time is economic growth, which leads to higher overall disposable income. As the economy grows, factors such as increased productivity, improved wages, and higher employment raise the available income for households, causing both their consumption spending and saving to rise concurrently.

Saving Function

The saving function captures the relationship between saving and disposable income. Defined as the difference between disposable income and consumption, it is graphed in the saving schedule with saving on the vertical axis and disposable income on the horizontal axis. Unlike a simple inverse relationship to consumption, both consumption and saving tend to increase with income, reflecting that higher income results in higher levels of both, even though the marginal propensities differ.

Disposable Income

Disposable income represents the income available to households after paying taxes. In both the consumption and saving schedules, disposable income is typically plotted on the horizontal axis, as it is the primary factor influencing the levels of both consumption and saving. It provides the baseline from which consumption and saving decisions are made.

Consumption Function

The consumption function is a fundamental concept in macroeconomics that describes the relationship between disposable income and consumption. It is depicted in the consumption schedule where consumption is on the vertical axis and disposable income on the horizontal axis, showing that as income increases, consumption generally increases as well, reflecting a direct relationship.

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