Question

Write short note on the following: 1. Keynes' short run consumption function and its properties. 2....

Write short note on the following:

1. Keynes' short run consumption function and its properties.

2. Comparasion between two-sector and three-sector spending multipliers.

Homework Answers

Answer #1

1)

Consumption function refers to the relationship between the consumption and factors that influence it. According to Keynes, real consumption depends on the real income. It is also known as the psychological law of consumption. following are properties of consumption function:

  • Consumption is function of real income. But whole income is not spent on consumption, part of income is saved. Hence, Marginal propensity to consume is greater than zero but less than 1 or 0<MPC <1.
  • There is no proportional relationship between consumption and income; instead there is non-proportional relationship between these two. Consumption increases at decreasing rate when income rises. In other words APC (Average Propensity to Consume) and MPC (Marginal Propensity to consume) fall.
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