Question

State the Keynesian theory of propensity to consume.

Answer 1

1. Household Consumption Expenditure:
   1. It is the most important component of aggregate demand.
   2. Households spend a major portion of their income on consumption.
2. Consumption Function (Propensity to Consume):
   1. It shows the relationship between total desired consumption and income.
   2. Expressed as C = f(Y), where C = consumption and Y = income.
3. Keynesian View:
   1. As income increases, consumption also increases, but less than proportionately.
   2. This implies a positive but diminishing relationship between income and consumption.
4. Determinants of Consumption:
   1. Income (most important factor)
   2. Other factors include:
      • Rate of interest
      • Wealth and liquid assets
      • Expectations about future income
      • Stock of consumer durables
      • Consumer credit availability
      • Distribution of income