Question

Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship?

Short answer

As consumption decreases, the proportion of disposable income saved increases, and thus the saving schedule shifts upwards, equal to the downward shift in consumption schedule.

The exception to the equal and opposite movement of consumption and saving schedules occurs because of taxes.

Step-by-step solution

Equal and opposite shifts in consumption and saving schedule

The macroeconomic relationship between income, consumption, and savings says that the total income is split into two parts, consumption and saving.All the proportion of income that is not consumed is saved.

Y = C + S

Also, consumption is directly related to income.As income increases, consumption and savings both increase.

Nevertheless, consumption and savings are inversely related to each other. An increase in consumption results in a decrease in savings if the income is constant, and vice-versa. Therefore, the consumption and saving schedule shifts equally in the opposite direction.

Reason for exception

Personal taxes affect the consumption and saving habits of people. Higher taxes mean lower disposable income, resulting in lower consumption and savings. Thus, the consumption and savings move in the same direction, which is the opposite of the change in taxes.

Thus, an increase (decrease) in taxes reduces (increases) the consumption and saving of individuals, which creates an exception to the equal and opposite movement of consumption and saving schedules.