Page 71 - DECO402_Macro Economics

Macroeconomic Theory

Notes takes constant value in both short period and long period. The principle of Keynes proved unsatisfied
because it can not describe statically short period rationally in consumption and income.
For understanding that we are differentiates in rational and non-rational consumption function.
Consumption function are rational when APC is constant at every level of income and equals to MPC
as show in figure 7.1. Where consumption C cut on origin O. When income are change as OY to OY
1
2
then on E and E points with C curve APC = MPC. In other words, on E point of line 45 APC = OC /
°
1
2
1
1
OY 1 and MPC =∆ C/×2 Y = 1 consumption function is non-rational when APC is reduces with the
1
increment in income. In Figure 7.2, C is the consumption function. OY income level to the C curve
1
on E point of APC > MPC, where APC = OC /OY and MP C = ∆C/∆Y = ER/RE but OY level of
0
0
1
1
part when C curve insects on E point to line 45°, there APC=MPC.
0

Fig. 7.1 Fig. 7.2

Notes Keynes renders the principle of consumption function in his book General
Theory.
There are any study are perform in the last of 1930 A.D. and in median of 1940 A.D. that are based on
time-series and cross-section of budget issue. Keynes’s principle proves by these studies that is calls
absolute income Hypothesis.
Kuznets studied the data in 1946 of income and consumption of USA in 1869-1938 time periods and the
consumption function of that duration is 0.9. Then he conclude that there are not nature at below side
in average APC according to it as income increases with the long period nature then APC = MPC. Its
mean is that long period consumption function is a simple line that passes on original point, as show
in figure 7.3 by Cl line. Bold smith again inspections
of that conclusion in 1955 A.D. and conclude that
long period consumption function is constant on 0.87
or 0.9. It gets by these two study that short period
consumption function is a non-rational because
APC>MPC and long period consumption function is
rational, MPC = APC,. So both study is disclaimers to
each other and becomes a puzzle for economist. For
solving it many economist tries to reconcile in long
period and short period consumption function and
“as solution are resolve in that tries to re-define the
free component in consumption function”. Above
we are studying such principle of consumption Fig. 7.3
function.

64 LOVELY PROFESSIONAL UNIVERSITY