Autonomous Consumption

Definition

Autonomous consumption refers to the level of consumer spending that occurs independently of changes in income. It represents the minimum amount of consumption that individuals or households will engage in regardless of their current financial situation.

5 Must Know Facts For Your Next Test

1. Autonomous consumption is a key component of the Keynesian theory of aggregate demand, which emphasizes the role of consumer spending in driving economic growth.
2. The level of autonomous consumption is determined by factors such as consumer confidence, wealth, and expectations about the future, rather than just current income.
3. Autonomous consumption sets a floor for total consumption, as it represents the minimum level of spending that will occur even if disposable income falls to zero.
4. In the Keynesian Cross model, autonomous consumption is represented by the vertical intercept of the consumption function, which indicates the level of consumption when income is zero.
5. Changes in autonomous consumption can shift the aggregate demand curve, leading to changes in equilibrium output and employment in the economy.

Review Questions

• Explain how autonomous consumption relates to the Keynesian theory of aggregate demand.
  • In the Keynesian framework, autonomous consumption is a crucial component of aggregate demand. Autonomous consumption represents the minimum level of consumer spending that occurs independently of changes in income. This means that even if disposable income falls, there is a certain level of consumption that will still take place. The level of autonomous consumption, along with the marginal propensity to consume, determines the slope of the consumption function and the shape of the aggregate demand curve. Changes in autonomous consumption can shift the aggregate demand curve, leading to changes in equilibrium output and employment in the economy.
• Describe the relationship between autonomous consumption and the Keynesian Cross model.
  • The Keynesian Cross model is a graphical representation of the relationship between aggregate demand, aggregate income, and equilibrium output. In this model, autonomous consumption is represented by the vertical intercept of the consumption function, which indicates the level of consumption when income is zero. This means that even if disposable income is zero, there is a certain level of consumption that will still occur, known as autonomous consumption. The level of autonomous consumption, along with the marginal propensity to consume, determines the slope of the consumption function and the shape of the aggregate demand curve. Changes in autonomous consumption will shift the consumption function and the aggregate demand curve, leading to changes in the equilibrium level of output and employment in the economy.
• Analyze how changes in autonomous consumption can impact economic stability and growth in the Keynesian framework.
  • In the Keynesian theory, changes in autonomous consumption can have significant implications for economic stability and growth. An increase in autonomous consumption, for example, will shift the aggregate demand curve to the right, leading to a higher equilibrium level of output and employment. This can contribute to economic growth and stability, as it indicates that consumers are willing to spend more even in the absence of changes in their disposable income. Conversely, a decrease in autonomous consumption will shift the aggregate demand curve to the left, resulting in a lower equilibrium output and employment level. This can lead to economic instability and potentially a recession. The Keynesian framework emphasizes the importance of maintaining a stable and robust level of autonomous consumption to support economic growth and employment, as it provides a foundation for aggregate demand and helps cushion the economy against fluctuations in disposable income.

Related terms

Disposable Income: The amount of income an individual or household has available for spending and saving after deducting taxes and other mandatory payments.

Marginal Propensity to Consume (MPC): The proportion of an additional unit of income that is spent on consumption rather than saved.

Keynesian Cross: A graphical model that illustrates the relationship between aggregate demand, aggregate income, and equilibrium output in the economy.