Propensity to Consume or Consumption Function: To construct macroeconomic models as developed by Keynes, it is necessary to have a clear understanding of the consumption function. In fact, the concept of the consumption function is the 'heart' of the Keynesian analysis. The concept of propensity to consume (i.e., willingness to consume) or the so-called consumption function is based on a [...]
Learn about the Paradox of Thrift in Saving and Investment. Equilibrium national income occurs when planned saving equals planned investment. This saving-investment statement of the equilibrium condition once became a bone of contention between the classicists and Keynes. The debate centred around the virtue or vice of saving or consumption. The controversy between them stemmed from the determinant of saving. [...]
According to classicists, there will always be full employment in a free enterprise capitalist economy because of the operation of Say's Law and wage-price flexibility. This classical theory came under severe attack during the Great Depression years of 1930s at the hands of J. M. Keynes. He rejected the notion of full employment and instead suggested full employment as a [...]