Question

What is the consumption function? Explain the different elements in the Keynesian consumption function. What role does the consumption function play in the determination of equilibrium income in the Keynesian system?

Answer 1

Consumption expenditure shows the relationship between consumption expenditure and income.it shows consumption expenditure at various levels of income.

C=c+mpc*Y

Where C = consumption expenditure

c= autonomous consumption,which is consumption expenditure when income is zero.

MPC = Marginal propensity to consume is the coefficient that show the how much consumption expenditure increase due to increase in income.

Y is national income.

National income is sum of final expenditure made in the economy.

Because consumption expenditure is a final expenditure,so consumption expenditure is a component of national income.

So higher the consumption expenditure will be ,the higher will be national income.