Consumption, Saving, and the Supply of Loanable Funds
Consumption
Consumption is a function of income and, possibly, the interest rate. The marginal propensity to consume is often assumed to be close to, but less than one.
Savings
Savings is an increasing function of income and, possible, the interest rate. S(Y,R).
Getting Started with EconModel
The EconModel presentations are interactive graphical simulations of models. more info.
To activate the EconModel presentation you need to download and install the EconModel program. more info.
Analysis
The EconModel presentation shows that savings results from intertemporal substitution. In this generalization of the Two Goods - Two Prices Model, agents maximize utility over two goods: consumption in the present and consumption in the future. The interest rate plays the role of the relative price of these two options.
Budget Constraint
Indifference Curves
The Interest Rate
Permanent Income Hypothesis
An alternative view.
References
Intertemporal Consumption, Wikipedia.
Permanent Income Hypothesis, Wikipedia.
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Loanable Funds