Problems with Consumption Functon
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Appears that a Keynesian consumption function based only on current disposable income is insufficient to explain fully the short run changes in consumer expenditure:

1.      Actual consumption v. much less than such a model would forecast in early 90s (Uncertain future incomes, unemployment, negative wealth effect – falling asset prices and desire to pay off accumulated debt).  Actual consumption much higher late 80s (falling unempl, rising house Ps)

2.      In Short Run, consumption fluctuates less than disposable income (SR mpc < LR mpc)

In general (major exception late 80s – early 90s) consumers try to keep relatively smooth cons’n patterns over business cycle: a) economic recovery (disposable income rising rapidly) – initially cautious: consumption will rise but not in proportion to Y.  b) Falling disposable income – will try to maintain consumption as best they can.

Other Notes in this Category

1. Access to credit / Financial Deregulation
2. Consumption
3. Consumption and Saving Exam Questions
4. Determinants of Consumption
5. Inflation
6. Interest Rates and Monetary Policy
7. Key Points
8. Other Theories of the Consumption Function
9. Problems with Consumption Functon
10. Unemployment/Consumer Confidence/Uncertainty
11. Wealth Effect – Asset Prices, Debt Burden, and Windfall Gains

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