The consumption and saving functions in the Keynesian model Suppose we observe that a person's disposable income (DI) is 50,000 in 2019 and 63,000 in 2020. Suppose we observe that this person's consumption (C) is 47,000 in 2019 and 58,700 in 2020. Assume that this person's consumption obeys the Keynesian consumption function, so that C = A + MPC*DI. Finally, assume that A and MPC are unchanged between 2019 and 2020. (a) Calculate the values of A and MPC for this consumer, and graph the consumption function. (Hint: subtract the C function in 2019 from the C function of 2020).
(b) In general, saving is given by the formula S = DI - C. Calculate this person's saving in 2019 and 2020. Assuming that this person's wealth (net worth) on January 1, 2019 was 80,000, what is their wealth on January 1, 2020? on January 1, 2021?
(c) In general, if consumption is given by the function C = A + MPC DI, then saving will obey the saving function S = -A + (1 - MPC)*DI. Plot the saving function graphically for the consumer in this problem (using the values you found in part (a)). What is this consumer's marginal propensity to save?
(d) Calculate the level of disposable income such that saving is exactly zero for this person. If disposable income is less than this level, what happens to saving? Explain how a person can have negative saving, and give two examples of how a person can finance negative saving.