Prosperity and Depression.pdf

Chap. 8 Recent Discussions on the Trade Cycle 2.2.'marginal propensity to save is zero; if the former is zero, thelatter is I.It should be kept in mind that the terms" propensity to consume(save) " and " marginal propensity to consume (save) " are usuallyused in the schedule sense-that is to say, they usually denote thewhole schedule, showing what proportion ofdifferent hypotheticalincomes or increments to income an individual or society as awhole would consume (save). Sometimes, however, when speakingofthe propensity to consume, reference is made to a particularpoint (mainly the point actually realised) on the schedule ofaltematives. Although it will usually be clear from the contextin what sense the word is used, it would be better to speak, whennot referring to the schedule as a whole, of" the rate of consumption(saving)" 1 or, better still, of " the proportion of incomeconsumed (saved) ".What is the relation between the marginal propensity to consumeand the multiplier? The relationship is quite simple :fj,¥=kfj,[fj,¥k=-·fj,!Since fj, Y = fj, C + fj, I,k= fj,¥fj,Y-fj,CIfj,C1-­fj,YThus, the multiplier k is, by definition, equal to I divided by Iminus the marginal propensity to consume; and the marginalI:!C I. fj,C.propensity to consume, _.. , is equal to I -/e-' SInce I --y JS thefj,Yfj,marginal propensity to save, we can also say that the multiplier is therepicrocal ofthe marginal propensity to save, and vice versa. We1 It will be observed that what is meant is not the time rate of consumption(saving), the amount consumed (saved) per unit of time, but theincome rate, amount consumed (saved) per unit of income. This rate ofconsumption is measured by ~ ; the rate of saving by;. Since S= Y-C,the rate of saving is I minus the rate of consumption: ~ = I -~.