Page 77 - DECO402_Macro Economics

Macroeconomic Theory

Notes function to upper side E and E with C on C curve. If depression will start once again on OY status
2
S2
1
2
1
of income, then consumption function will falls and go to C point with CS and income reaches on
2
2
OY status. But during recovery in short period, consumption again will until then increase with long
1
period consumption function C unless it did not reach on short period consumption function C .
S2
L
Its reason is that when income increases with more from its present status OY , then consumption-
1
income ratio (APC) becomes constant in long period. Short period consumption function reaches on
C to C to shifting up but consumption long period function reaches to E to E on CL. But when
S1
2
1
S2
income is falls then consumers reaches backwards to E to C on C curve. It is ‘Ratchet Effect’. When
S2
2
2
income increases in long period, then short period consumption function raise to up side, but when
income falls then it shifting below and did not come to last status.
Did You Know? When income increases during the period of recovery, then consumption
increases fast with the increment in savings.
Self Assessment
Multiple Choice Questions:
4. The preferences of consumers are….. .………….. on each other.
(a) dependent (b) attached
(c) nirasakt (d) none of these
5. In any two communities, the difference of relative income hypothesis of people is…… the
consumption expenses.
(a) restricted (b) determined
(c) low (d) high
6. Consumption relation is unchanged in time, and it is not-
(a) Unchanged (b) Related
(c) Change (d) None of these

8.2 Relative Income Hypothesis’s Criticisms

However, the principle of Dussenberry solves the direct opposition between short period and long
period study, but there are many drawbacks in that-
1. No Proportional Increase in Consumption: The assumption of Relative Income principle
is that income and consumption are rationally increases. But there is not always rational
increment in consumption by the increment on full employment status.
2. No Direct Relation between Consumption and Income: This principle is assuming that
consumption and income are directly related. But this thing is not supported on the bases of
experience. Consumption is not always reducing according to business depression. Example,
consumption was not reducing during business depression of 1948-49 and 1974-75.
3. Distribution of Income not unchanged: Presented principle is based on assumption that
the distribution of income is approximately unchanged being change on the level of whole
income. If income reorganized in more similar side with the increment in income, then the

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