Y
d
excludes taxes paid by households and includes transfer payments made to households by the
government. For now, we are assuming that
T
does not depend on
Y
—that is, net taxes do not
depend on income. This assumption is relaxed in Appendix B to this chapter. Taxes that do not
depend on income are sometimes called
lump-sum taxes.
As Figure 9.1 shows, the disposable income (
Y
d
) of households must end up as either con-
sumption (
C
) or saving (
S
). Thus,
Y
d
C
+
S