Consumption and Savings What is the main determinant of consumption in Keynesian theory? In the Keynesian view, current disposable income is the main determinant of consumer spending. Disposable income is gross income minus income tax on that income. Which is flatter according to empirical evidence, the short or the long run consumption function? Evidence began to accumulate that the short run consumption function was flatter than the long run consumption function. In the other words short run mpc is less than long run mpc. How may the life cycle theory and permanent income hypothesis help to explain the empirical evidence? Both theories imply that m.p.c., which is the slope of the consumption function, is lower in the short run than it is in the long run. In the PIH any unexpected increase in income isn’t consumed, but largely saved, whereas in the LCH it is spread over the consumer’s lifetime. If follows that the multiplier predicted by these theories will be small in the short run. Changes in government spending and
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