Answer to Question #238947 in Macroeconomics for salim

Question

based on relationship between consumption expenditure and income, there is fundamental difference between Keynesian consumption model and the two models that are based on the Fischer intertemporal choice model. what is the difference?

Answer 1

In the Keynesian consumption model, the rate of consumption is directly beelated to the current income. Under this model, the average propensity to consume will always decrease with increase in income. The marginal propensity consume in this case lies between 0 and 1. On the contrary, the Fischer intertemporal choice model shows how rational forward looking customers choose their present consumption and that of the future so as to maximize their lifetime satisfaction.