Although many other factors help to determine the amount of consumption and saving, disposable income is easily the most important. Furthermore, any determinant of consumption must also be a determinant of saving: By definition, any amount of disposable income that is not spent must be saved. Likewise, any fraction of a change in disposable income that is not spent must be saved. That is, C + S = DI and MPC + MPS = 1.

Exploration: How are disposable income, consumption, and saving related?

The consumption schedule graphically illustrates the relationship between consumption and disposable income. While the fraction of disposable income that is spent typically declines as income increases, it is usually assumed that consumers spend a constant fraction of any change in income. That is, the consumption schedule is linear with a slope less than one.

The graph shows a typical consumption schedule and its corresponding saving schedule. Initially, consumers are assumed to spend $1250 when disposable income is zero ("autonomous consumption.") The MPC is set to .75, indicating that consumers spend 75% of any change in their disposable income (and save 25%). Combined, these two imply that consumers will spend all of their disposable income when the latter is at $5000, as shown in the graph. At this level of income, saving must be zero.

To use the graph, click and drag the blue diamond to change the level of disposable income; the corresponding values for consumption and saving will be updated in the chart. Drag any of the scroll buttons to change the values of the MPC, MPS, or autonomous consumption.

1		If the MPC is .75, by how much will consumption increase if disposable income increases by $1000? By how much will saving increase?
2		If the MPC rises to .85, what happens to the MPS?
3		Suppose an increase in the values of their stock and bond portfolios causes consumers to increase desired consumption by $100 at every level of income. How will this affect saving? If the MPC is .75, what is the level of income at which saving is zero? At this level of income, how much is being consumed?
4		Generalize the relationships between the consumption and saving schedules: Any factor which shifts the consumption schedule must _____. Any factor which raises the MPC must _____.

In a closed private economy, where there is neither a government nor foreign sector, aggregate expenditures are equal to consumption expenditures plus planned gross investment expenditures. The equilibrium output of such an economy is that level of output at which the total amount of spending is just equal to the amount produced, or GDP. That is, equilibrium GDP = C + I_g. Consumption expenditures rise with GDP while planned gross investment expenditures are independent of the level of GDP. The aggregate expenditures schedule shows the amount of desired spending at each possible output level and can be used to determine the equilibrium level of output.

Exploration: What level of GDP is sustainable as an equilibrium?

The graph illustrates the relationship between aggregate expenditures – consumption plus planned gross investment – and the level of GDP, labeled "Y" on the graph. The graph also includes a 45 degree line. All points on this line share the feature that spending, measured on the vertical axis, is equal to GDP, measured on the horizontal axis. As such, points on this line are a graphical statement of the equilibrium condition that planned expenditures equal GDP. To change the starting value of real GDP, click and drag on the blue triangle. As you drag the triangle, note the "Y" labels on both axes. These move together along the 45 degree line to indicate the same level of GDP, representing potential equilibria. Click on the Income Adjustment button to see how actual Y and AE will adjust back to equilibrium.

5		Currently the level of GDP is $470 billion. What is the level of desired consumption spending at this level of GDP? What is the level of investment spending?
6		At what level of GDP is saving equal to zero? At what level of GDP is saving equal to $40 billion?
7		If GDP is $510 billion, what is the level of aggregate expenditures, C + Ig?
8		What are the MPC and the MPS in this simple closed, private economy?
9		What happens to GDP if desired aggregate spending exceeds the amount produced?
10		Explore on your own. How is the difference between saving and investment related to equilibrium GDP?