Question

7. What are the determinants of consumption according the Keynesian view? Write the consumption function and explain its meaning in detail.

Answer 1

According to Keynes, the determinants of consumption is the income. The in the consumption function, we can see that the it is the function of only income level. Thus,

where, C is the level of consumption and the Y is the level of income.

We can represent the consumption function suggested by Keynes as:

Where, b is the MPC. And a is the Autonomous Consumption.

The MPC is the ratio of the change in consuption due to change in the income. It ranges from 0 - 1. That means when the income increases, the consumption also increases but by a lesser amount thus the value of MPC is always less than the 1. This determines the slope of the consumption curve.

Autonomous consumption is the level of consumption which is independent of the level of income. That means even when the income is zero, the consumer has to consume something from his past saving or by borrowing. So, this cannot be zero.

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