Keynes postulated that the marginal propensity to consume (MPC), the rate of change of consumption for a unit (say, a dollar) change in income, is greater than zero, but less than 1. I would like to know if this always holds. If not, under which conditions may this theory fail to hold?
As Friedman said, the difference between monetarists and Keynesians is one of time horizon. MPC does not hold over a long period. It just seems to hold in the short rund due to the logic of the Permanent income hypothesis.
Oh ok, Thanks a lot Lotta for the opinion shared. Your point is well noted and appreciated
Individuals smooth their consumption according to their permanent income, so transitory income shock affect savings instead of consumption (see Paxson, 1992). In addition, in perfect risk sharing model, individual always smooth their consumption unless there is no aggregate shock, no matter the idiosyncratic shock in transitory income (see Alem and Townsend, 2001)
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