Final answer:
If your income remains constant and your expenses decrease, your savings will increase because the money that isn't spent can be saved. this is a direct relationship where less spending with unchanged income leads to more savings.
Step-by-step explanation:
If your income is constant, and your expenses decrease, the effect on your savings can be understood through basic financial principles. The remaining amount after all expenses have been paid is your savings. Thus, if expenses decrease and income remains unchanged, your savings would increase. This is because you are spending less money while your earnings stay the same. The extra funds that are not spent on expenses will accumulate as increased savings over time.
Looking at some scenarios, if a person's annual income is $50,000 and their annual expenses reduce from $45,000 to $40,000, then their savings would increase from $5,000 to $10,000. In the context of a household, if the expenses related to consumption fall, whatever is not used for consumption contributes directly to the amount saved, following the idea of marginal propensity to consume. factors that can affect this relationship include a decrease in taxes, a fall in interest rates, or even a sudden rise in wealth or rise in future expected income that could change the desire to save. However, with a constant income and a decrease in expenses, the simple arithmetic leads to an increase in savings.