Question

3. ‘In the Keynesian macroeconomic model, a key role is played by the consumption function’. Explain this statement.

Answer 1

One of the most important terms in the Keynesian Macroeconomic model is the Marginal propensity to consume. It is the change in consumption due to $1 increase in income. All fo the multipliers in Keyniesain macroeconomic depend on the value of MPC. The higher the MPC the higher will the value fo the multipliers and the more easier it will be to control the economy suing the Keynesian tools. now the value of MPC comes from the consumption function. A standard consumption function is as follows:

C = A + cY

where A is the autonomous consumption which will happen irrespective of the income and c is the marginal propensity to consume (dC/dY).

The value of expenditure multiplier is = 1/(1-c)

the value of tax multiplier is = -c/(1-c)