Answer to Question #233438 in Macroeconomics for Saakhaa

Question

Consider the numbers in Table 5-1 giving consumption as a percentage of income in pros perous years (1929, 1955, 1973, 1979, 1989, 2000, 2006) compared with recession years (1933, 1958, 1975, 1982, 1991, 2001, 2008). Notice that in each case consumption is higher as a 2001 percentage of income in the recession years. Is this outcome what you would predict on the basis of Keynes's consumption function given by equation (5.9)? Explain.

Answer 1

Data

As per the Keysian consumption function C = C* + bY, consumption is the function of real income. This means that the level of consumption is directly dependent upon the level of real income. 

But in the above given data , particularly in the recessionary years , the consumption is higher which should have been less as per the keynsian consumption function because income drops in recession. But this has not been shown in table.

Hence the given values of consumption do not hold true with keynsian consumption function.