Question

Explain the key determinants of consumption and saving in the Keynesian model

Short answer

The main determinants of the Keynesian model will be as follows :

• Disposable Income
• A change in the marginal propensity to consume or for savings
• Various other miscellaneous factors

Step-by-step solution

Introduction

• According to the Keynesian model, the two basic concepts of an economy are consumption and income.
• Any economic model is described with the help of these two figures.
• By the term consumption, we mean the expenditure that any household needs to make because of the consumption of goods and services inside an economy.
• Consumption is considered to be an important part of the consumer's income.
• Any consumer would always like to save some part of his or her income.
• The remaining part apart from the consumption is known as savings.
• So basically we can define savings as the difference between the income and the consumption of a consumer inside an economy.

Explanation

The prime expression of Keynes is given as : $C=\alpha +\beta Y\text{.}$

In the above expression, $\alpha$is defined as the Autonomous Consumption,

$\beta$is defined as the Marginal Propensity to Consume and $Y$is the Disposable Income

Now considering the savings of the consumer, we get that :

$S=-\alpha +(1-\beta )Y$

In the above expression,

$\alpha$- is defined as the negative savings of the consumer because of the consumption that is financed by the savings and $(1-\beta )$is the Marginal Propensity to Save

Detailed Explanation

The main factors will be explained as :

• Disposable Income : With the increase of the disposable income the consumption and savings of a consumer rises and accordingly the value of marginal propensity of savings and consumption.
• A change in the marginal propensity to consume or for savings : With the increase of marginal propensity of consumption, the consumption level rises and when the marginal propensity to save rises then the savings of the consumer also rises.
• Various other miscellaneous factors: There are various other factors which can directly or indirectly affect the consumption or the savings of a consumer. These factors include the tax rate, the transfer of payments and wealth. For an example, if the tax rate is high, then the disposable income will be low and similarly the consumption and the savings will be low. But if we consider the rise of transfer payments then with the rise of transfer payments the disposable income will rise and so will be the level of consumption and savings. And increasing the wealth will lead to the increase in the consumption and savings of the consumer in an economy.