Consumption expenditures are induced because people are prone to spend the income they have. If they have more income, then they are inclined (that is, induced) to spend more. If they have less income, then they spend less. Induced consumption simply means that income is the most important factor affecting consumption expenditures. Other factors are important, but income is at the top of the list. People cannot buy if they have no income.

Induced consumption plays a critical role throughout the study of Keynesian economics. First and foremost, induced consumption is key to effective demand and embodies the fundamental psychological law that John Maynard Keynes proposed as an essential difference between his theory and classical economics.

Induced consumption is then reflected by the slope of the consumption line and the marginal propensity to consume (MPC). The MPC is important to the slope of the aggregate expenditures line which also affects the value of the expenditures multiplier.

Induced Through An Equation

C

=

a

+

bY

The two key parameters that characterize the consumption function are slope and intercept. Induced consumption is indicated by the slope of the consumption function. Autonomous consumption is indicated by the intercept.

• An Induced Slope: The slope of the consumption function (b) measures the change in consumption resulting from a change in income. If income changes by $1, then consumption changes by $b. This slope is generally assumed and empirically documented to be greater than zero, but less than one (0 < b < 1). It is conceptually identified as induced consumption and the marginal propensity to consume (MPC).


• An Autonomous Intercept: The intercept of the consumption function (a) measures the amount of consumption undertaken if income is zero. If income is zero, then consumption is $a. The intercept is generally assumed and empirically documented to be positive (0 < a). It is conceptually identified as autonomous consumption.

Induced Through A Line

Consumption Line

For reference, a black 45-degree line is also presented in this exhibit. Because the 45-degree line has a slope of one, it indicates that the induced slope of the consumption line is less than one.

The two primary characteristics of the consumption function--slope and intercept--are also identified by the consumption line.

• An Induced Slope: The slope of the consumption line presented here is positive, but less than one. In this case the slope is equal to 0.75. Click the [Slope] button to highlight. Once again this is induced consumption and the marginal propensity to consume (MPC).


• An Autonomous Intercept: The consumption line intersects the vertical axis at a positive value of $1 trillion. Click the [Intercept] button to highlight. And once again this is autonomous consumption.

Other Induced Expenditures

• Investment is induced by income because an expanding economy generally boosts business profit, which is then used for investment expenditures on capital goods.


• Government purchases are induced by income because extra income generates more tax revenue (especially state and local tax revenue), which is then used by government to finance expenditures.


• Net exports, the difference between exports and imports, are induced through imports, which are induced in the same fashion as consumption expenditures. An increase in income is not just used to purchase domestic goods, but also imported goods.