Objective Factors Which Governs the Propensity to Consume
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Objective Factors Which Governs the Propensity to Consume

Objective Factors which governs the propensity to consume The objective factors are: (i) Distribution of income, (ii) Fiscal policy, (iii) Substantial changes in rate of interest, (iv) Changes in business expectations.

Objective Factors which governs the propensity to consume

The objective factors are:

(i) Distribution of income,

(ii) Fiscal policy,

(iii) Substantial changes in rate of interest,

(iv) Changes in business expectations.

(v) Windfall gains and losses.

(vi) Liquidity preference.

Apart from the amount of the NI, consumption behavior of the financial system will also be subjective to the pattern of income distribution. It will be normally experienced that the marginal and average consumption of the underprivileged group are larger than those of the wealthy. If, for instance, you give an extra rupee to a poor man, the theory is that of this supplementary revenue, he will spend more amount than in situation if the same amount were to be provided to a rich man. This is for the reason that the poor has a lot of unfulfilled needs and he is prone to grasp every occasion that arrives his way to please them. On the new side, the prosperous individuals already have better living standards and comparatively less vital wants wait to be fulfilled, thus, an addition of their revenues is more probable to be accumulated rather than spend on expenditure.

Consumption is characteristically the role of the poor and saving characteristically the role of the rich. Hence, given the NI, a more equivalent allocation of incomes will craft for an elevated Consumption pattern and, consequently, will increase the importance of the multiplier.

Similarly, fiscal policy of the government will also control the consumption activities of a country. A decrease in taxes will leave more post taxation revenues with the public and this will encourage them to spend more on expenditure; a raise in taxation will discourage consumption. Of the two forms of taxation, i.e., direct as well as indirect taxes, the second will have additional effect on expenditure than the former, chiefly when direct taxation are progressive in their frequency.

Hence, the constitution of fiscal policy has a significant control on the expenditure activities of the economy. Amendments in fiscal system are likely to bring about changes in the consumption-income graph. Present development towards welfare state, funded by progressive taxes, have a propensity to swing upwards the function of consumption.

PS- NI Means National Income

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