Economics and the 2008 crisis: a Keynesian view

3.2 Building a consumption function (2)

We now have a hypothetical consumption function.

Activity 4

Look at Figure 5 and answer the questions that follow.

Question 1

Figure 5 A consumption function

(a) What is the equation of the consumption function we have drawn?

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Answer

The equation is: C = 0.7Y

Question 2

(b) In what way is it unrealistic to suggest, as in this example that the consumption function would start from the origin?

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Answer

Even with no income, there must be some consumption: households need to consume basic goods so would need to borrow or run down savings balances to finance this consumption. This bare minimum consumption that does not depend on income is known as exogenous consumption. Exogenous consumption is usually symbolised by a.

Question 3

(c) How would the consumption function be affected if exogenous consumption (usually symbolised by a) was £100? Answer by picking up and dragging the consumption line to take account of this level of exogenous consumption.

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