Question

state and explain the four principles of consumption function by keynes
b) given the following information on a small closed economy
C=1000-0.75Yd,Yd= disposable income
I =100
G=200
Y=160
i) solve the goods market equilibrium (y,c and Yd);
ii) what is the value of marginal propensity to consume
iii) find the multiplier at the level of autonomous spending
iv) what will be the increase in national income if investment increases by 50

Answer 1

The four principles are: 1.Real consumption expenditure is a real function of real income. 2. MPC must lie between 0 and 1.3. APC will be declining as the income increases. 4. The MPC remains constant or decreases as the income level increases.

1. Y=C+I+G,

Y=1000-0.75Y +100 +200

160=1300-0.75YD,

YD=1520, C= -140.

2. The MPC is the slope of the consumption function and so this is 0.75 here.

3. The multiplier is given by M=1/(1-c) where c is the MPC and so here the multiplier is 4.

4. Given the multiplier, an increase in investment by 50, will mean that national income will rise by 200.