4 BASIC ECONOMETRICS
Consumption expenditure
X
Income
1
β2 = MPC
β1
Y
FIGURE I.1 Keynesian consumption function.
10John Maynard Keynes, The General Theory of Employment, Interest and Money, Harcourt
Brace Jovanovich, New York, 1936, p. 96.
1. Statement of Theory or Hypothesis
Keynes stated:
The fundamental psychological law . . . is that men [women] are disposed, as a
rule and on average, to increase their consumption as their income increases, but
not as much as the increase in their income.10