First, Keynes conjectured that the marginal propensity to consume—the amount con-
sumed out of an additional dollar of income—is between zero and one. This means that
if an individual’s income increases by a dollar, both consumption and saving increase.
Second, Keynes conjectured that the ratio of consumption to income—called the
average propensity to consume—falls as income rises. This implies that the rich save a
higher proportion of their income than do the poor.
Third, Keynes conjectured that income is the primary determinant of consump-
tion. In particular, he believed that the interest rate does not have an important effect
on consumption.
A consumption function that satisfies these three conjectures is
C = C + cY.
C is a constant level of “autonomous consumption,” and Y is disposable income; c is the
marginal propensity to consume, and is between zero and one.