Model Answer
0 min readIntroduction
The Keynesian theory of consumption, a cornerstone of macroeconomic thought, posits that consumption expenditure is the primary driver of aggregate demand. This theory, developed by John Maynard Keynes in his seminal work *The General Theory of Employment, Interest and Money* (1936), proposes a relationship between disposable income and consumption. The consumption function expresses this relationship, distinguishing between autonomous consumption – expenditure that doesn’t depend on income – and induced consumption – expenditure that changes with income. This question requires us to determine the autonomous component of consumption given a specific income and total consumption level.
Understanding the Consumption Function
The basic Keynesian consumption function is represented as:
C = a + bY
Where:
- C represents total consumption expenditure.
- a represents autonomous consumption – the level of consumption that occurs even when income (Y) is zero. This reflects essential spending on necessities.
- b represents the marginal propensity to consume (MPC) – the proportion of an increase in income that is spent on consumption.
- Y represents disposable income.
Solving for Autonomous Consumption
We are given that C = 600 when Y = 1500. We need to find the value of 'a' (autonomous consumption). However, we are missing the value of 'b' (MPC). Without the MPC, we cannot directly solve for 'a'. The question, as stated, is incomplete. However, we can *assume* that the given consumption level is at a point where the entire income is consumed, meaning C = Y. This is a simplifying assumption to proceed with the calculation.
If we assume C = Y = 1500, then the equation becomes:
1500 = a + b(1500)
However, the question states C = 600 when Y = 1500. Therefore, we can directly substitute these values into the consumption function:
600 = a + b(1500)
Since we don't have the value of 'b', we cannot find a unique solution for 'a'. If we *assume* b = 0 (meaning no induced consumption), then:
600 = a + 0(1500)
Therefore, a = 600
However, this is a highly unrealistic assumption. A more reasonable approach would be to acknowledge the missing information and state the condition required to solve the problem. To solve for 'a', we need the value of 'b' (MPC). If 'b' were known, we could substitute it into the equation and calculate 'a'.
Illustrative Example (Assuming MPC = 0.2)
Let's assume the MPC (b) is 0.2. Then:
600 = a + 0.2(1500)
600 = a + 300
a = 600 - 300
a = 300
In this case, autonomous consumption would be 300.
Limitations and Considerations
The Keynesian consumption function is a simplification of real-world behavior. Factors like wealth, interest rates, consumer confidence, and expectations also influence consumption. Furthermore, the assumption of a stable MPC may not hold true in reality.
Conclusion
In conclusion, while the question provides the total consumption and income, it lacks the crucial information – the marginal propensity to consume (MPC) – necessary to uniquely determine autonomous consumption. We can only solve for autonomous consumption by making assumptions about the MPC. Acknowledging the missing information and demonstrating the calculation process with an assumed MPC value is the most appropriate response. A complete understanding of the Keynesian consumption function requires recognizing its limitations and the influence of other factors on consumer spending.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.