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Which one of the following statements of relationship of national income (Y) ,Consumption (C) and and Investment (I) in the famous model of Keynes is correct

Which one of the following statements of relationship of national income (Y) ,Consumption (C) and and Investment (I) in the famous model of Keynes is correct Correct Answer Y=C + I

  • The economic development of a country refers to an increase in the standard of living of its people coupled with a sustained growth rate.
  • The main hypothesis of Keynes suggested that our disposable income which can be arrived at by deducing tax liabilities from gross income influences our level of real consumption. Further explanation on this is
  • C = f (Y) where C stands for consumption and Y stands for disposable income.
  • Keynes also held the view that people tend to enhance their consumption level along with a rise in their disposable income.
  • However, the increase in disposable income is greater than the increase in consumption. This hypothesis can be termed as our marginal propensity to consume and indicates a positive correlation between these two variables.
  • This, if our income increases by one unit, our marginal propensity to consume increases by 0.8 units. Hence the remaining 0.2 units are used for savings.
  • Y = C + S where Y stands for disposable income, C stands for consumption and S stands for savings.
  • It is also imperative to note here that the propensity to consume and desire to consume are not similar in nature as the former means effective consumption.
  • Both objective and subjective factors influence our consumption function. Tax policy, interest rate, windfall profit or loss, and holding of assets are some objective functions whereas subjective ones relate to motives of foresight, precaution, avarice, and improvement amongst individuals.

  • A fundamental macroeconomic accounting identity is that saving equals investment.
  • By definition, saving is income minus spending.
  • Investment refers to physical investment, not a financial investment. That saving equals investment follows from the national income equals national product identity.
  • Hence, the relationship of national income (Y) , Consumption (C) and Investment (I) in the famous model of Keynes is Y=C + I.

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