Keynesian Consumption Function (Absolute Income Hypothesis)

Household consumption is influenced by the levels of income, tax and many other factors. However, income and tax, jointly taken as disposable income, can be used to determine and predict consumption behaviour. The net effect of the other factors can be taken as exogenous to the model and be captured as an amount of consumption that is constant and independent of income. So we can write Keynes's Consumption Function as: So we can write Keynes's Consumption Function as: C = C0 + c1 (YD) where:

Absolute income hypothesis

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Jump to: navigation, search The Absolute Income Hypothesis is theory of consumption proposed by English economist John Maynard Keynes (18831946), and has been refined extensively during the 1960s and 1970s, notably by American economist James Tobin (19182002).[1]

The theory examines the relationship between income and consumption, and asserts that the consumption level of a household depends on its absolute level (current level) of income. As income rises, the theory asserts, consumption will also rise but not necessarily at the same rate.[2] Marginal propensity to consume is present in Keynes' consumption theory and determines by what amount consumption will change in response to a change in income. While this theory has success modeling consumption in the short term, attempts to apply this model over a longer time frame have proven less successful. This has led to the absolute income hypothesis falling out of favor as the consumption model of choice for economists.[3] The marginal efficiency of capital (MEC) is that rate of discount which would equate the price of a fixed capital asset with its present discounted value of expected income. MEC The term marginal efficiency of capital was introduced by John Maynard Keynes in his General Theory, and defined as the rate of discount which would make the present value of the series of annuities given by the returns expected from the capital asset during its life just equal its supply price.[1]

relative-income hypothesis
Definition
noun

the theory that people are more interested in keeping their living standards up to a level which is relative to the standards of people around them or to the standard they enjoyed previously rather than looking for an absolute increase in income. This hypothesis was superseded by the permanent-income hypothesis of Milton Friedman

Acceleration Principle
(1917) Acceleration principle is formulated by American economist John Maurice Clark (1884-1963). Acceleration principle is a theory of investment in modern macroeconomics. It asserts that the level of investment is accelerated only through the rate of increase in output, which is the gross domestic product. Since the acceleration principle links investment to output, it is has explanatory value also in understanding the development of business cycles. According to the acceleration principle, each level of output needs a specific amount of capital. Therefore, if output (and the capital required to procure the necessary machinery) is expected to rise, the amount of capital within an economy will also increase. The accelerator equation is: I = t, where: I is net investment in year t, is the accelerator coefficient, and t is the annual change in income.