... on mpw respectively. The marginal propensity to withdraw (mpw) indicates the proportion of a rise in national income that is withdrawn. The marginal propensity to consume (mpc= ?C / ?Y) indicates the proportion of a rise in national income spent on consumption. The bigger mpc, the smaller is mpw and vice versa since the additional sum of mpc and mpw must be equal to one. As the mpc gives the slope of the consumption function relating consumption to national income (C= f(Y)), it is flatter in the short run than in the long run. This is because of the permanent income hypothesis proposed by M. Friedman (1957) that suggests that people base their consumption on what they regard as "normal" income. According to Friedman there are 2 types of income namely transitory and permanent income. Transitory income is temporary income which comes unexpectedly. Permanent income, on the other hand, is the ...

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