Why does an increase in autonomous saving decrease equilibrium income?

Question

Why does an increase in autonomous saving decrease equilibrium income? If autnomous saving and investment increase by same amount, what would be the effect on equilibirum income?

Answer 1

Anautonomous increase in savings would automatically mean an equal amount of decrease in the autonomous component of consumption expenditure { the part Co

in C= Co+ mpc(Y-T).]. Thus a n increase in autonomous Saving means a decrease in autonomous component of Consumption which would lead to a decline in equilibrium income. Please note Whatever is not saved out of After-tax income is actually consumed.

If both Savings and investment see an autonomous increase of equal amounts, the multiplier will be nil or zero. Because, increase in saving by $1 will mean change income by -1/(1-mpc) while an autonomous $1 increase in vestment will mean a change in income by 1/(1-mpc). Add the two changes:

-1/(1-mpc) +1/(1-mpc)= 0/(1-mpc) = 0.

Answer 2

I do not know who told you that increase in autonomous savings results in decreased income. Secondly what is equilibrium income and how is it different from income? Please start studying wealth the way chemist studies matter.

According to law of conservation, Income = Savings + consumption or expenditure. If savings increase, either consumption should decrease or income should also increase. If savings and investment increase, (generally investment = savings) when no other information is furnished we can predict whether income increases or decreases.