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