{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lec 5 Consumption.ppt - Consumption Lecture 5 Mentor Pham...

Info icon This preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 5 Mentor: Pham Xuan Truong ([email protected]) Consumption
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Content I John Maynard Keynes and the consumption function II Irving Fisher and Inter-temporal choice III Franco Modigliani and the life – cycle hypothesis IV Milton Friedman and the Permanent – Income Hypothesis V Other modern consumption models
Image of page 2
I John Maynard Keynes and the consumption function The consumption function was central to Keynes’ theory of economic fluctuations presented in The General Theory in 1936. + Keynes conjectured that the marginal propensity to consume — the amount consumed out of an additional dollar of income is between zero and one. He claimed that the fundamental law is that out of every dollar of earned income, people will consume part of it and save the rest. + Keynes also proposed the average propensity to consume, the ratio of consumption to income falls as income rises. + Keynes also held that income is the primary determinant of consumption and that the interest rate does not have an important role.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
I John Maynard Keynes and the consumption function d Y MPC C C . MPC Y C APC d /
Image of page 4
This consumption function exhibits three properties that Keynes conjectured + First, the marginal propensity to consume c is between zero and one. + Second, the average propensity to consume falls as income rises + Third, consumption is determined by current income Y. I John Maynard Keynes and the consumption function
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Simon Kuznets and secular stagnation During World War II, on the basis of Keynes’s consumption function, economists predicted that the economy would experience what they called secular stagnation— a long depression of infinite duration caused by insufficient investment compared with massive saving when income increases— unless the government used fiscal policy to stimulate aggregate demand. It turned out that the end of the war did not throw the United States into another depression, but it did suggest that Keynes’s conjecture that the average propensity to consume would fall as income rose appeared not to hold. Simon Kuznets constructed new aggregate data on consumption and investment dating back to 1869. His work would later earn him a Nobel Prize. Kuznets discovered that the ratio of consumption to income was stable over time, despite large increases in income; again, Keynes’s conjecture was called into question.
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern