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Unit-7: Theory of Consumption Function
Notes
Did You Know? All customers are the function of whole disposable income.
Self Assessment
Fill in the blanks:
1. Keynes renders the principle of consumption function in his book………………………..
2. Being increment and decrement in income…………………………expenses are also increase
and decrease.
3. The consumption function of Keynes gives the name of……………income hypothesis.
7.2 Absolute Income Hypothesis
The consumption function of Keynes gives the name of absolute income hypothesis that indicates
when income increase, then consumption is also increases but it increases less in comparison to the
increment of income and vice versa. Its mean is that the relation of consumption and income are non-
rational. James Tobin and Arthur Smithys inspected that hypothesis in different study and conclude
that the short period relation of consumption and income are non-rational, but gets by the time series
data that the long period relation of both are rational. The relation of consumption-income is because
by shifting up the short-period non-rational consumption function. For that different reason are
responsible. These reasons are describe below.
Self Assessment
Multiple Choice Questions:
4. Short-duration consumption function is-
(a) Non-rational (b) Rational
(c) A study (d) None of these
5. Long duration consumption function is-
(a) Rational (b) Non-rational
(c) Proportionate. (d) None of these.
6. When income increases during resilience period, then it increases with the increment in
saving-
(a) Consumption (b) non-enjoyment
(c) Expenses (d) None of these
First, Prof. Tobin involves the asset holder of the Negro and White families in budget study for
the inspection of that hypothesis. He concludes that for the assets of family are increases, then the
consumption are also increases then accordingly the consumption function is shift above. Second,
many new customer things came fast in use after finished the Second World War. Being the use of
these necessary things, the consumption function is shift to up. Third, the nature of urbanization is
increase after period of the War. The transfer speeds of public from rural areas to urban areas, the
consumption function shift up because the nature of consumption of urban labours is more then
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