Keynes' theory of consumption is that current real disposable income is the most important determinant of short-term consumption. Real income, income adjusted for inflation. It is a measure of the number of consumers who purchase goods and services within their income or budget. For example, an increase in money income of 20% of possible matches due to inflation increased by 20%. This means that real income or the amount of goods and services you can buy has remained continuous. Disposable income (Yd) = Gross income - (Direct tax deductions + benefits) The standard Keynesian consumption function is: C = a + c Yd where,C= Consumer expenditure a = autonomous consumption. At this level of consumption, this would happen even if income were zero. If an individual's income fell to zero, some of their existing expenses could be financed through savings. This is called dissaving. c = marginal propensity to consume (MPC). This is the change in consumption divided by the change in income. This is simply the percentage of each extra pound earned that is spent. There is a positive income-consumption relationship between disposable income (YD) and consumption expenditure (CT). Consumption curve degraded so that the marginal propensity to consume. As income increases, total consumption also increases. Changes in the marginal propensity to consume led to changes in the key function of consumption. In this case, the marginal propensity to consume resulted in a decrease at each income level to reduce consumption. This can be shown below: Key definitions of consumption Average propensity to consume = Total consumption divided by total income Average propensity to save = Total savings divided by ...... middle of paper ...... we have the following conditions: The economy begins at point U, and the government's decision, it hopes to reduce the level of unemployment, because it is too high. The 5% therefore decided to stimulate demand. Inflation will start soon, the demand for goods and services increases, so the increase in employment will soon be destroyed, people realize that there is no real increase in demand. It is along the Phillips curve from u to V that businesses began to lay off workers, the unemployment rate returned to W again. Then in business and consumers are ready and inflation expected . If the government insists on trying again, the economy will do the same thing (from W to X to Y), but this time at a higher level of inflation. Any attempt to reduce inflation below the U level will simply be inflationary. The U rate is the natural unemployment rate.