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TSR Wiki > Study Help > Subjects and Revision > Revision Notes > Economics > Problems with Consumption Function

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 was very 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 was much higher late 80s (falling unemployment, rising house prices)
2. In the short run, consumption fluctuates less than disposable income (SR mpc < LR mpc)

In general (the major exception being late 80s to early 90s) consumers try to keep relatively smooth consumption patterns over business cycle:

1. economic recovery (disposable income rising rapidly) – initially cautious: consumption will rise but not in proportion to Y.
2. Falling disposable income – will try to maintain consumption as best they can.

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