Questions for Review

1. First, Keynes conjectured that the marginal propensity to consume—the amount consumed out of an additional dollar of income—is between zero and one. This means that if an individual’s income increases by a dollar, both consumption and saving increase. Second, Keynes conjectured that the ratio of consumption to income—called the average propensity to consume—falls as income rises. This implies that the rich save a higher proportion of their income than do the poor. Third, Keynes conjectured that income is the primary determinant of consumption. In particular, he believed that the interest rate does not have an important effect on consumption. A consumption function that satisfies these three conjectures is