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Uncertainty and Consumption in Keynes's Theory of Effective Demand

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  • Sven Larson
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    Abstract

    Keynesian uncertainty normally exercises influence over effective demand via private investment. This paper expands the scope of influence of uncertainty to comprise private consumption as well. When private spending is explicitly made subject to uncertainty the individual consumer is forced to take active steps to make the future predictable. Contracted, sticky money prices are key tools in the consumer's efforts to keep uncertainty at a minimum and match earnings with consumption costs. However, even if prices are successfully contracted there is still need for preparedness against contingencies. Consumers therefore regulate their propensity to consume with reference to their confidence in the future: the propensity to consume is high when confidence is strong and low when confidence is weak. Because of its effect on the propensity to consume, consumer confidence exercises a significant influence on macroeconomic activity in general.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

    Volume (Year): 14 (2002)
    Issue (Month): 2 ()
    Pages: 241-258

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    Handle: RePEc:taf:revpoe:v:14:y:2002:i:2:p:241-258

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    1. Dow, Sheila C, 1995. "The Appeal of Neoclassical Economics: Some Insights from Keynes's Epistemology," Cambridge Journal of Economics, Oxford University Press, vol. 19(6), pages 715-33, December.
    2. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
    3. Hicks, John, 1989. "A Market Theory of Money," OUP Catalogue, Oxford University Press, number 9780198287247, October.
    4. Roy J. Rotheim, 1988. "Keynes and the Language of Probability and Uncertainty," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 11(1), pages 82-99, October.
    5. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September.
    6. Campbell, Carl M, III & Kamlani, Kunal S, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 759-89, August.
    7. Alan S. Blinder, 1991. "Why are Prices Sticky? Preliminary Results from an Interview Study," NBER Working Papers 3646, National Bureau of Economic Research, Inc.
    8. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
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