The hypothesis

The hypothesis - income rises, basic and urgent wants...

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The hypothesis The hypothesis implies that the tendency of propensity to consume shows progressive decline is its value at higher and higher levels of income . In other words MPC goes on falling in its value as level of income increase. Let’s illustrate this. 1) Level of Income Y 100 200 500 5000 2) Absolute 'C' expenditure 80 150 350 3250 3) Relative or percentage of 'C' to 'Y' 80 75 70 65 4) Gap between the two (Y-C) 20 50 150 1750 As income increases from 100 to 200 the increase is 100 percent since the income has doubled. But consumption expenditure has increased from 80 to 150 and has less than doubled. Out of additional or marginal income of 100, the marginal propensity to consume reduces from 0.8 to 0.7 (150 80 = 70 100 = 0.7). Similarly for other values of Y and C, Keynes’ hypothesis about progressively falling value of MPC seems to be realistic. It is based on the fact that as level of
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Unformatted text preview: income rises, basic and urgent wants having been already satisfied, additional consumption at additional income is likely to be smaller in proportion. This explains Keynes hypothesis that as level of income rises (100,200, 500 etc.) consumption expenditure will increase absolutely (C = 80, 150, 350 etc.), but will fall relatively (MPC = 0.8, 0.7 etc.). The effect of consumption behavior has far reaching consequences. Since 'C' is an important component of the effective demand, a progressive fall in its relative value cause a widening gap between 'Y' and 'C' (20,50,150). This is a source of the deficiency in the effective demand and hence a cause of unemployment ....
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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.

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