Consider a simple Keynesian medel where equilibrium output is determined by aggregate demand. Investment is autonomous and a constant proportion of the income is saved. In this framework an increase in the savings propensity has the following effect:
(a) It leads to higher level of output in the new equilibrium
(b) It leads to lower level of output in the new equilibrium
(c) The level of output in the new equilibrium remains unchanged
(d) The level of output in the new equilibrium may increase or decrease depending on the
degree of increase in the savings propensity.
The usual equation of IS curve is : Y0 = (multiplier)(A bar - bi)
Here investment is autonomous so b=0
So : Y0 = (multiplier)(A bar)
An increase in savings propensity will decrease the MPC (marginal propensity to consume) which will lead to a lower multiplier
Therefore lower Y0
Consider a simple Keynesian medel where equilibrium output is determined by aggregate demand. Investment is autonomous and a constant proportion of the income is saved. In this framework an increase in the savings propensity has the following effect