Althoug Keynes postulated a positive relationship between consumption and income, he did not specify the precise form of the functional relationship between the two. For simplicity, a mathematical economist might suggest the following form of the Keynesian consumption function:
Y = B1 + B2 X 0< B2 <1
where Y = consumption expenditure and X = income, and where B1 and B2, known as the parameters of the model are, respectively, the intercept and slope coefficients.
The slope coefficient B2 measures the MPC. This equation, which states that the consumption is linearly related to income, is an example of a mathematical model of the relationship between consumption and income that is called the consumption function in economics. A model is simply a set of mathematical equations. If the model has only one equation, as in the preceeding example, it is called a single-equation model, whereas if it has more than one equation, it is known as a multiple-equation model.
The variable appearing on the left side of the equality sign is called the dependent variable and the variable (s) on the right side are called the independent, or explanatory, variable (s). Thus, in the Keynesian consumption function, consumption (expenditure) is the dependent variable and income is the explanatory variable.
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