Keynesian_Consumption_Puzzle.pptxKeynesian_Consumption_Puzzle.pptx

Keynesian_Consumption_Puzzle.pptx

1. The Keynesian Consumption Puzzle Exploring the differences between short-run and long-run consumption behavior.

2. Background After World War II, economists questioned Keynes’ consumption function because it failed to match post-war consumption data.

3. The Problem Keynes predicted consumption would rise slower than income, but actual data showed much higher consumption levels.

4. Kuznets’ Findings Simon Kuznets (1946) studied U.S. data (1869–1938) and found that consumption and income were linearly related: C = cY.

5. Wartime Observations During wartime, government spending increased income, but the Average Propensity to Consume (APC) fell as prices rose.

6. The Stagnation Paradox Keynesians expected stagnation in demand, but consumption remained stable, contradicting Keynes’ short-run predictions.

7. Reconciling the Findings Both Keynes and Kuznets were correct in different time frames: Keynes in the short run and Kuznets in the long run.

8. Two Consumption Functions Short-run: C = a + cY (APC decreases) Long-run: C = cY (APC stable).

9. The Keynesian Consumption Puzzle The puzzle refers to confusion about whether APC declines or remains constant over time.

10. Final Conclusion Short run: APC falls with rising income (Keynes). Long run: APC stable (Kuznets). Both theories apply in different horizons.

11. Short-run vs Long-run Consumption Function