Question

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? LO30.1

Short answer

Consumption and saving schedules both measure variables against income. Both have a direct (positive) relationship with income.

Step-by-step solution

Determine the Variables for Consumption Schedule

In the consumption schedule graph, the variables measured along the axes are consumption and income. Consumption is plotted on the vertical axis, while income is plotted on the horizontal axis.

Determine the Relationship in the Consumption Schedule

Consumption and income have a direct (positively) related relationship in the consumption schedule. As income increases, consumption also increases.

Determine the Variables for Saving Schedule

For the saving schedule graph, the variables measured along the axes are savings and income. Savings is plotted on the vertical axis, while income is on the horizontal axis.

Determine the Relationship in the Saving Schedule

Savings and income are also directly (positively) related in the saving schedule. As income rises, savings typically increase.

Explain the Fundamental Reasons for Higher Levels of Consumption and Saving

The fundamental reason that levels of consumption and saving in the United States are higher today than they were a decade ago is primarily due to increased income levels. Other contributing factors can include economic growth, inflation, and population growth.

Key concepts

Saving Schedule

A saving schedule illustrates the relationship between national income and savings. It works just like a pair of scales, showcasing how savings stack up as income rises. Think of the saving schedule as a guide to understand how people decide to put aside money over earning it.
In a saving schedule graph, savings are plotted on the vertical axis, while income is plotted on the horizontal axis. As income increases, households and individuals tend to save more money, creating a direct relationship between income and savings.
When income climbs, so does the tendency to save. This schedule helps to visualize and predict saving behavior as income levels change over time. It's crucial for financial planning and assessing economic stability.

Income

Income represents the flow of cash from various sources such as wages, salaries, business profits, and other investments. It's a main driver of both consumer spending and saving habits.
Income is critical because it forms the backbone of both consumption and savings. In graphical representations, income is usually plotted on the horizontal axis. As a person's or household's income increases, they have more financial flexibility to decide how much to spend or save.
This increase in income not only allows for more consumption but also contributes to higher savings rates. Therefore, monitoring income trends provides insights into broader economic health, individual financial well-being, and overall growth potential.

Consumption

Consumption refers to the spending by households on goods and services. It reflects the direct relationship with income, where higher income typically leads to higher consumption levels.
In the consumption schedule, consumption is plotted on the vertical axis. The direct relationship implies that as people earn more, they tend to spend more as well. This is due to increases in purchasing power and potential improvements in living standards.

• More income allows for higher expenditure on essentials like housing and food.
• It also enables discretionary spending on luxury items or services.

This relationship highlights how important it is for economies to ensure stable income growth to keep consumption levels high, driving the economic engine forward.

Savings

Savings refer to that portion of income not spent on consumption. They play a vital role in individual financial health and overall economic stability.
Savings provide a safety net for unforeseen expenses, retirement, or investment into various growth assets. In economic graphs, savings show up as one line that grows with income, initially small, but increases as disposable income rises.
Ideally, people save more as their income grows, as evidenced by the saving schedule. The ability to save and the rate at which people save can greatly influence economic health, investment potential, and future financial security.