Question

What are the determinants of consumption according the Keynesian view? Write the Keynesian consumption function and explain its meaning in detail (15 points).

Answer 1

Meaning of consumption function

The consumption function states that aggregate real consumption expenditure of an economy is a function of real national income. This is called the Keynesian Consumption Function. ... The aggregate consumption in the economy can be found out from the consumption expenditure of different individuals purchasing commodities.

Consumption function= consumption/real income

Determinants of consumption function

Consumption function, in economics, the relationship between consumer spending and the various factors determining it. At the household or family level, these factors may include income, wealth, expectations about the level and riskiness of future income or wealth, interest rates, age, education, and family size.

Consumption demand depends on income and propensity to consume. Propensity to con­sume depends on various factors such as price level, interest rate, stock of wealth and several subjective factors. Since Keynes was concerned with short-run consumption function he assumed price level, interest rate, stock of wealth etc. constant in his theory of consumption. Thus with these factors being assumed constant in the short run, Keynesian consumption function considers consumption as a function of income. Thus

C= f(Y)

In a specific form, Keynesian function can be written as:

C = a + f(Y)

where a and b are constants. While a is intercept term of the consumption function, b stands for the slope of the consumption function and therefore represents marginal propensity to consume.