Key determinants of consumption & savings in the Keynesian model.
Concept:
Keynesian model: The Keynesian
Explanation of Solution
According to Keynes, the consumption function takes the following form:
Here,
Y= Disposable Income (It refers to the income which is left after payment of taxes and receiving transfer payments).
While, the saving function takes the following form:
Here,
As per the models stated above, the main determinants of consumption and savings are listed below:
(a) Disposable Income: As we have seen, Keynes consumption and saving functions are major functions of disposable income. It is clear that income can be either consumed or saved. Whenever, disposable income rises, consumption and savings rise, according to the corresponding values of marginal propensity to consume (MPC) and marginal propensity to save (MPS) respectively.
(b) A change in marginal propensity to consume or save: If due to any reasons, marginal propensity to consume (MPC) rises, the consumption level also rises. If marginal propensity to save (MPS) rises, then saving level rises.
(c) Miscellaneous Factors: Other factors include, tax rate, transfer payments and wealth, which in turn affects disposable income and indirectly affects the corresponding consumption and savings level in the economy. If the tax rate is high, the disposable income will be low, and the corresponding consumption and savings will also be low.
On the other hand, if transfer payments rise, the disposable income rise and corresponding consumption and savings will also rise. A rise in wealth will increase consumption and savings level in the economy.
Note: As per Keynesian model, the real interest rate has not been taken into the main determinant of consumption and savings function.
Want to see more full solutions like this?
Chapter 12 Solutions
Economics Today: The Macro View (19th Edition) (Pearson Series in Economics)
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education