Understanding Keynesian Consumption Function

Policy Research
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Policy Research
Considering how households respond to any rise in money supply is one of the best reasoning that can be embraced to establish whether monetary policies and fiscal policies are either expansionary or contractionary. The Keynesian consumption function illustrates that real disposable income and real consumption have a supposedly stable connection. If the money supply is not accompanied by a rise in real income, it will have little effect on spending (Boug et al., 2021). The exchange equation deliberates that a rise in money supply without an corresponding rise in real income will either lead to a drop in velocity or a rise in commodity prices. According to Keynesians, velocity is inherently unsteady, and it may alter in reaction to changes in money supply. As a result, monetary policies are deemed as inefficient, given that they only influence velocity and price levels, and not the real output.
The monetarists claim that this is not the case. A rise in cash balances results in an overabundance of cash. Individuals are likely to spend more to reduce their extra cash balances, resulting in in...