Economics and the 2008 crisis: a Keynesian view
Economics and the 2008 crisis: a Keynesian view

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Economics and the 2008 crisis: a Keynesian view

3.1 Building a consumption function (1)

According to Keynes, there is a fairly stable relationship between planned consumption and current income. Households plan to spend a fairly constant proportion of each additional pound they earn. He calls this proportion the ‘marginal propensity to consume’. To present this diagrammatically, we start with two axes at right-angles to each other.

Activity 3

The horizontal axis of Figure 4 shows income (Y) and the vertical axis shows planned consumption (C).

Active content not displayed. This content requires JavaScript to be enabled.
Figure 4 Plotting planned consumption against income
Interactive feature not available in single page view (see it in standard view).

Suppose that consumers plan to spend 70 pence of each additional pound they earn. The marginal propensity to consume is 0.7. The usual symbol for the marginal propensity to consume is b. So, we can say b = 0.7.

Click on three points on Figure 4 which would lie on the consumption function.

DD209_1

Take your learning further371

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses372.

If you are new to university level study, we offer two introductory routes to our qualifications. Find out Where to take your learning next?373 You could either choose to start with an Access courses374or an open box module, which allows you to count your previous learning towards an Open University qualification.

Not ready for University study then browse over 1000 free courses on OpenLearn375 and sign up to our newsletter376 to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371