Consumption according to Keynes

macro

This page is related to Keynes Theory.

The Consumption function of John Maynard Keynes

$C=\overline{C}+cY$ --------Keynes

$C$ - consumption

$\overline{C}$ - subsistence level of consumption (As $Y=0$, $C=\overline{C}$) （也可以理解为维持生计所需要**的消费）

$Y$ - (Disposable) Income

c - Marginal propensity to consume (i.e. MPC, $0<c<1$)

Keynes comes with 3 conjecture:

1. Higher income leads to higher consumption and higher saving

2. Average Propensity to consume (APC) falls as Y increases

3. Consumption doesn’t depend on interest rate

Note that the data after WW2 doesn’t support these ideas, especially the 2, that is in many countries, $\frac{C}{Y}$ doesn’t falls as $Y$ increases.

Now We use a model to explain why, that’s called the Life-cycle Hypothesis

Reference

Macroeconomics, eleventh edition, Mankiw, Chapter 20