Question

According to the keynesian model, what are the two components of consumption spending? what factors determine how consumption changes when real disposable income changes? explain.

Answer 1

A simple Keynesian model follows four principles:

1. Accumulated expenditures, income, and output are the same.
2. All input of spending into the economy must equal all withdrawals
3. Investment is an input.
4. Saving is a withdrawal

According to Keynesian analysis, of households intend to save more, they will become poorer. The theory about Keynesian analysis applies to economic where an increase in savings decreases the circular flow of income. S when the households save more, they are reducing the stream of income for other households and therefor diminishes the overall economic activity.