Macroeconomics | BBE | Unit 1 | Lesson 2 | Consumption Puzzle | Failure of Secular Stagnation | APC

This lesson discusses the Keynesian Consumption Function. This is for all the students studying Macroeconomics and specially for 4th semester BBE students of University of Delhi.
The following topics have been discussed in this lesson:
The Early Empirical Success to test Keynes Conjectures:
Findings 1:
1. Households with higher income consumed more and this confirms that MPC is greater than 0
2. Households with higher income saved more and this confirms that MPC is less than 0
3. Higher income households saved a larger fraction of their income and this confirms that APC reduces as income increases.
Findings 2: For the period between 2 world wars.
1. When income was low such as during Great Depression, both consumption and savings were low, indicating MPC is greater than 0 and less than 1.
2. With low income, the APC that is the ratio of consumption to income was high.
3. Finally because the correlation between income and consumption were strong, no other variable appeared to be important for explaining consumption. Thus, income is the primary determinant of how much people choose to consume.
Anomalies: Related to APC
Anomaly 1: Failure of Secular Stagnation
On the basis of Keynesian Consumption as the economists feared that after World War II, as the income increases, APC will reduce and savings will increase and there might not be enough profitable investment projects to absorb all the savings. So, low consumption should have led to inadequate demand for goods and services resulting in depression that is Secular Stagnation ( a long depression of indefinite duration) unless fiscal policy was used to expand Aggregate Demand.
But fortunately for the economy and unfortunately for the Keynesian Consumption Function, although after World War II, the incomes were much higher than before, but they did not lead to large increases in the rate of savings.
Thus, Keynes' Conjecture that APC reduces as income increases did not appear to hold.
Anomaly 2: Simon Kuznets Constant Rate
Kuznets assembled the aggregate data on consumption and income from 1869 in 1940s and discovered that
1. APC was remarkably stable from decade to decade, despite large increases in income.
2. Thus, Keynes Conjecture that APC reduces with increase in income does not hold.
So, the failure of secular stagnation hypothesis and findings of Kuznets both indicated that the APC is fairly constant over long periods of time.
So, this fact presented a puzzle and economists wanted to know -- why the Keyne's conjectures hold up well in the studies of household data of short-time series, but failed when the long-time series were examined.
So, the consumption puzzle is that the evidence suggested there were two consumption functions
1. Short-Term Consumption function with falling APC
2. Long-Term Consumption function with constant APC
Modigliani and Friedman proposed the explanations of these contradictory findings and solve the consumption puzzle.
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[@sinan5464]

Quality of presentation ❤

[@Hakahah_o]

Thank you so much ma'am. Your videos are helping a lot.
You have explained in an easy and understandable manner.
Thanks a lot. 🤍

[@NikhilYadav-u3v7o]

thank you ma'am for the video and as you know 4th sem exams are coming up hope you will upload rest of the units a little sooner.

[@dr.triptisangwan]

Sure

[@karanvirsangwan8696]

Great

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Thanks

[@kanandaverma9033]

Thank you for the video Ma’am!

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Welcome beta

[@ansya2686]

Thank you ma'am! You are the best🌼

[@dr.triptisangwan]

Pleasure 😀

[@meghasharma-s8s]

could u please suggest a good reference book for this

[@mayank5535]

Thank you mam✨ pls upload entire bbe 4th sem macro

[@dr.triptisangwan]

As soon as possible

[@vidhigovil8657]

Thank u so much mam
much needed

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Welcome

[@nord7556]

Hello ma'am, is there a way to download your handwritten notes that were used in this video? Thank you.

[@rishabhyadav369]

thank you ma'am

[@dr.triptisangwan]

Welcome

[@rishabhyadav369]

pls upload investment part

[@dr.triptisangwan]

Yes after consumption theories.

[@manisha.s4581]

Can you explain it in english

[@namitagauri3043]

maam pls provide the pdf of these notes, it'll be very helpful

[@akshatbhasker2442]

thank you ma'am

[@dr.triptisangwan]

Welcome