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Questions and Answers
According to Keynes' fundamental principle, as income increases, consumption increases by an equivalent amount.
According to Keynes' fundamental principle, as income increases, consumption increases by an equivalent amount.
False (B)
In the consumption function equation $C = cY_d + C0$, $C0$ represents autonomous consumption, which is the level of consumption independent of disposable income.
In the consumption function equation $C = cY_d + C0$, $C0$ represents autonomous consumption, which is the level of consumption independent of disposable income.
True (A)
The marginal propensity to consume (MPC) is calculated as the change in income divided by the change in consumption $(\Delta Y / \Delta C)$.
The marginal propensity to consume (MPC) is calculated as the change in income divided by the change in consumption $(\Delta Y / \Delta C)$.
False (B)
If the MPC is 0.8, this means that for every additional dollar of disposable income, 80 cents is spent on consumption.
If the MPC is 0.8, this means that for every additional dollar of disposable income, 80 cents is spent on consumption.
The average propensity to consume (APC) is calculated as total savings divided by total income.
The average propensity to consume (APC) is calculated as total savings divided by total income.
If disposable income increases and the MPC remains constant, the average propensity to consume (APC) will increase.
If disposable income increases and the MPC remains constant, the average propensity to consume (APC) will increase.
At the 'breaking point,' all income is saved, meaning consumption is zero.
At the 'breaking point,' all income is saved, meaning consumption is zero.
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) is always equal to zero.
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) is always equal to zero.
If $\Delta C$ represents the change in consumption and $\Delta Y$ represents the change in income, the fundamental psychological law implies that $\Delta C > \Delta Y$.
If $\Delta C$ represents the change in consumption and $\Delta Y$ represents the change in income, the fundamental psychological law implies that $\Delta C > \Delta Y$.
Disposable income ($Y_d$) is calculated as income (Y) minus taxes plus transfers.
Disposable income ($Y_d$) is calculated as income (Y) minus taxes plus transfers.
Flashcards
Keynes' fundamental principle of consumption
Keynes' fundamental principle of consumption
The idea that individuals tend to increase consumption as income rises, but not by the full amount of the increase.
Autonomous Consumption (C0)
Autonomous Consumption (C0)
The portion of consumption that's independent of income; the minimum level of consumption needed for survival.
Marginal Propensity to Consume (MPC)
Marginal Propensity to Consume (MPC)
The change in consumption resulting from a change in income (ΔC/ΔY).
Average Propensity to Consume (APC)
Average Propensity to Consume (APC)
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Disposable Income (Yd)
Disposable Income (Yd)
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Savings (S)
Savings (S)
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Marginal Propensity to Save (MPS)
Marginal Propensity to Save (MPS)
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Average Propensity to Save (APS)
Average Propensity to Save (APS)
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The Breaking Point
The Breaking Point
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Dissaving
Dissaving
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Study Notes
- Study notes on the Keynesian consumption function, macro-economics level for 1st Preparatory Year
Keynes' Fundamental Principle
- Individuals tend to increase consumption as income rises, but not to the same extent as the income increase
- An increase in income (Y) leads to a smaller increase in consumption (C).
The Consumption Function
- The consumption function formula: C = cYd + C0
- C0 (Autonomous Consumption): represents the minimum subsistence level required by the population of a country, which is the consumption when income (Y) is zero.
- c (Marginal Propensity to Consume - MPC): is the change in consumption (ΔC) divided by the change in income (ΔY), showing the proportion of additional income spent.
- Yd (Disposable Income): income after taxes and transfers (Yd = Y - taxes + transfers).
- MPC indicates the proportion of income growth devoted to consumption.
- MPC is the slope of the consumption line.
- The Fundamental Psychological Law implies that both consumption and income changes are positive (ΔC and ΔY > 0), but the change in consumption is less than the change in income (ΔC 1
- c = s = MPS (Marginal Propensity to Save): MPS represents the change in savings (ΔS) divided by the change in income (ΔY).
- APS: defined as the average propensity to save, which is the ratio of savings to income (S/Y)
- Relationship Between Propensities: MPS + MPC = 1 and APS + APC = 1
The Breaking Point
- This is when all income is consumed, i.e. Y= C or S=0
- If the State does not intervene, so Yd =Y, the formula is derived as: Y= 𝟏/(𝟏−𝒄) x C0
Consumption and savings relationship
- Dissaving: Occurs when savings (S) are less than zero (S < 0)
- Saving: Occurs when savings (S) are greater than zero (S > 0)
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