How consistent is the Keynesian consumption function with the ...

[mrsjacobs44]

How consistent is the Keynesian consumption function with the random walk hypothesis?
 
  What will be an ideal response?

Question 2

In the New Keynesian model, the stabilization effects of fiscal and monetary policy are different because
 
  A) the effects on the composition of output are different.
  B) monetary policy does not work in a liquidity trap, but fiscal policy does.
  C) monetary policy affects spending on goods indirectly; fiscal policy affects spending directly.
  D) all of the above.

[joshbk44]

Answer to Question 1

For changes in aggregate income that are unexpected, the Keynesian consumption function captures the impact on current consumption. If economic behavior is guided by rational expectations, and there are no surprises, then aggregate income reflects all available information so, again, the Keynesian consumption function is a good model.

Answer to Question 2

D

[mrsjacobs44]

Thank you

[joshbk44]

Happy to help you