Saving is induced because people are prone to divert a portion of the income they have away from consumption. They do so in response to interest payments and to accumulate future purchasing power. If they have more income, then they are inclined (that is, induced) to save more. If they have less income, then they save less. Induced saving simply means that income is the most important factor affecting saving. Other factors are important, but income is at the top of the list. People cannot save if they have no income.

Induced saving is a complement to induced consumption. An increase in income induces the household sector to increase both consumption AND saving. This reflects the fundamental psychological law that John Maynard Keynes proposed as an essential difference between his theory and classical economics. He contended that people spend a substantial portion of extra income, but not all. The part not spent is diverted to saving.

Induced saving is reflected by the slope of the saving line and the marginal propensity to save (MPS). The MPS plays a key role in the value of the expenditures multiplier.

Induced Through An Equation

S

=

c

+

dY

The two key parameters that characterize the saving function are slope and intercept. Induced saving is indicated by the slope of the saving function. Autonomous saving is indicated by the intercept.

• An Induced Slope: The slope of the saving function (d) measures the change in saving resulting from a change in income. If income changes by $1, then saving changes by $d. This slope is generally assumed and empirically documented to be greater than zero, but less than one (0 < b < 1). It is conceptually identified as induced saving and the marginal propensity to save (MPS).


• An Autonomous Intercept: The intercept of the saving function (c) measures the amount of saving undertaken if income is zero. If income is zero, then saving is $c. The intercept is generally assumed and empirically documented to be negative (a < 0). It is conceptually identified as autonomous saving.

C

=

a

+

bY

Because income not spent is saved, the saving function can be specified as:

S

= -

a

+

(1-b)Y

Induced Through A Line

Saving Line

The two primary characteristics of the saving function--slope and intercept--are also identified by the saving line.

• An Induced Slope: The slope of the saving line presented here is positive, but less than one. In this case the slope is equal to 0.25. Click the [Slope] button to highlight. Once again this is induced saving and the marginal propensity to save (MPS).


• An Autonomous Intercept: The saving line intersects the vertical axis at a negative value of -$1 trillion. Click the [Intercept] button to highlight. And once again this is autonomous saving.

Other Induced Expenditures

• Investment is induced by income because an expanding economy generally boosts business profit, which is then used for investment expenditures on capital goods.


• Government purchases are induced by income because extra income generates more tax revenue (especially state and local tax revenue), which is then used by government to finance expenditures.


• Net exports, the difference between exports and imports, are induced through imports, which are induced in the same fashion as saving. An increase in income is not just used to purchase domestic goods, but also imported goods.