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Unformatted text preview: consumption expenditure will increase in (b) proportion where (a) is the initial amount of consumption even when income is zero. Therefore (b) is the propensity or tendency of consumers to spend a certain proportion of the income. If we assume the value of b as 0.8, it would mean that people spend 80 percent of their income on consumption. If we assume a = 0 then we have : C = by and where b = 0.8 C = 0.8y If Y = 100 then : C = 0.8 (100) = 80 Keynes has further postulated nature of the behavior of the propensity to consume. It is in the form of the law of marginal propensity to consume (MPC). It is known as Keynes hypothesis of MPC. It is as follows : "With every increase in the level of income consumption, expenditure will increase absolutely but will fall relatively."...
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This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.
- Fall '10