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Questions and Answers
What is consumption?
What is consumption?
The act of spending income for buying goods and services to satisfy wants.
What is the consumption function?
What is the consumption function?
A relation between consumption and its various determinants.
Which of the following is NOT a determinant of consumption?
Which of the following is NOT a determinant of consumption?
What does MPC stand for?
What does MPC stand for?
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According to Keynes, what is the most important determinant of consumption?
According to Keynes, what is the most important determinant of consumption?
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What does the equation $C=f(Ya)$ represent?
What does the equation $C=f(Ya)$ represent?
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Marginal propensity to consume (MPC) is always equal to 1.
Marginal propensity to consume (MPC) is always equal to 1.
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According to Keynes, the psychological law of consumption states that consumption increases as income increases, but not by as much as the increase in income. This is described by the __________.
According to Keynes, the psychological law of consumption states that consumption increases as income increases, but not by as much as the increase in income. This is described by the __________.
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Study Notes
Keynesian Consumption Function
- Keynesian consumption function assumes consumption is primarily influenced by income.
- Higher income leads to higher consumption.
- Keynes' "psychological law of consumption" states that while increased income leads to increased consumption, the increase in consumption is less than the increase in income.
Consumption and Investment
- The text focuses on a two-sector model, which simplifies the economy by ignoring government and foreign trade.
- Total output (Y₁) equals consumption (C) plus savings (S), or aggregate demand(AD).
- In this model, consumption plus savings equals consumption plus investment (C+S=C+I).
Consumption
- Consumption is the act of spending income on goods and services to satisfy wants.
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Determinants of consumption:
- Disposable income (after-tax income)
- Accumulated wealth or assets
- Expected future income
- Actual price level
- Expected general price level
- Rate of interest
- Personal thriftiness
- Age, sex, and family size
Consumption Function
- The consumption function represents the relationship between consumption and its determinants.
- A general consumption function can be written as: C=f(Ya, W, Ye, P, Pe, r, s, DF.....)
- Ya = Disposable income
- W = Wealth
- Ye = Expected future income
- P = Actual price level
- Pe = Expected general price level
- r = Rate of interest
- s = Thriftiness
- DF = Other factors
Keynesian Consumption Function
- Keynes argues that disposable income is the most important determinant of consumption.
- The Keynesian consumption function is represented as: C=f(Ya), 1>f>0
- C = Consumption demand
- Ya = Disposable income = (Y-T)
- Y = Personal income
- T = Taxes related to income
Keynesian Psychological Law
- Keynes' "fundamental psychological law" suggests that individuals increase their consumption with increased income, but not by the same amount.
- This implies that the marginal propensity to consume (MPC) is positive but less than one (0<MPC<1).
- MPC is the change in consumption due to a change in disposable income.
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Description
This quiz explores the Keynesian consumption function, which emphasizes the relationship between income and consumption. It discusses how higher income impacts consumption and the basic elements of the two-sector model of consumption and investment. Test your understanding of the determinants of consumption and the implications of these economic theories.
