Since saving is defined as household income not spent on consumption (i.e., Y - C ≡ S), one obtains (by substituting a + by for c) the saving schedules S = -a + (1 - b) Y, which in Figure 2 is shown to intersect the investment schedule at Y = $100 million.
Spending on consumption, investment and net exports all increase.
Many researchers argue that the bulk is spent on consumption with little being used on productive investment.
Milton Friedman suggests that the total amount spent on consumption is on the average the same fraction of permanent income, regardless of the size of permanent income.
Most of the money is spent on consumption — food, clothing or a birthday bash — which leads some economists to discount its impact on development.
"It is a staggering fact that around 40% of what we spend on consumption of food and drink at home comes from price promotions," she said.
As a result of this – and increasing industrialisation and globalisation over the same period – those of us in Europe, North America and Japan have had much more money to spend on consumption.
In this equation the coefficient a is a constant indicating the amount that households will spend on consumption independently of the level of income received in the current period, and the coefficient b gives the fraction of each dollar of income that will be spent on consumption goods.
Saving, in particular, is of primary import insofar as it leads producers to accumulate capital stocks over time, beyond merely recouping their initial investments, plus profit spent on consumption.
It is straightforward to confirm that this is indeed an equilibrium: one plus the real interest rate equals the ratio of marginal utility in any two successive periods; because the nominal interest rate is positive individuals have an incentive to acquire only as much cash as they need, so all money will indeed be spent on consumption.
