Page 73 - DECO402_Macro Economics

Macroeconomic Theory

Notes workers of field. Fourth, after long duration,
the population of old age people increases.
Though old age people are not earning, but they
consume things. To increase them population,
the consumption function is shift up.
“According to Absolute income principle, these
reason are shift consumption function at level
side as necessary to established rational among
consumption and income in long period and so
it stops to seems like that those seems the non-
rational relation only based on income.”
Fig. 7.4

Task Express his ideas on consumption function principle of Keynes.

Absolute income hypothesis presents in figure 7.4 where C is a long period consumption, as we grow
l
with long period curve then it present the rational relation among consumption and income.
Example, On A and B point of that curve APC and MPC is equal. CS and CS is the short period
1
2
function. But those reason are describes above, because of that these consumption function are increases
up side from A to B point with C . But C and C will not increase the dotted part of consumption
2
1
1
function in the same proportion as increase in income. So this part shows the non-rational relation.
It’s Critical Appraisal: The quality of that principle that it force on all element except income that
preset the customer-behaviour. That is not described by Keynes. But the problems are that it non-
rational consumption function continues with assumption. As Pro. Shapiro objected, “Now economist
feels that basic consumption function are rational its mean to ignores the main principle of absolute
hypothesis.”

Self Assessment
State whether the following statements are True or False:
7. It principle of Keynes proves unsatisfied because it can rationally describe the statistics long
period in consumption and income.
8. Kuznets studied the data in 1946 of income and consumption of USA in 1869-1938 time
periods.
9. When income increase then consumption are also increase.
10. In consumption function tries to re-define the free component.

7.3 Summary

y The relation between consumption and income is dependent on Keynes ‘Psychological rule
of consumption’ it indicates that when income increases then consumption expenses is also
increases but in low quantity. In other words, being increment in income, consumption expenses
are not increase as proportionally.

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