When we talk about Consumption Function , we draw the 45 degree line of Income or Aggregate supply curve simultaneously.
But while graphing saving function , we don't show Income curve (45 deg. line) on same graph .
Why is it so ?
Why don't we draw National Income Curve(45 deg. line) simultaneously with graph for Saving Function?
Add a comment
|
1 Answer
$\begingroup$
$\endgroup$
The role of 45 degree line while showing a consumption function is that the 45 degree line translates the values on x-axis to equal values on y-axis. The consumption function is drawn on an income and aggregate expenditure plane. Hence the 45 degree line shows consumption + savings which is aggregate output or aggregate supply or income.
The other way to look at it is when you add up consumption function and saving function on the income- expenditure plane you will get a 45 degree line.
You can show the 45 degree line along with the saving function and the difference between 45 degree line and the saving function will reflect the consumption expenditure.
Another intuition that you will get is that the saving function will never intersect the 45 degree line which is representative of the fact that there is some consumption at the 0 level of income and rate of increase in savings is less than the rate of increase in income which is very obvious.
