Answer to Question #290924 in Macroeconomics for Harish

Question

"Changes in disposable income lead to moments along a consumption function and changes in well and other factors shift the entire consumption faction" do you agree? Explain

Answer 1

Solution:

Yes, I agree with the above statement.

Changes in disposable income lead to moments along a consumption function since when income increases, consumption rises since MPC becomes positive, hence making the consumption function slope upwards and vice versa.

 

Changes in other factors such as real wealth and interest rates will shift the entire consumption function since they are determinants of the consumption function. Therefore, when they change, they make the curves shift upwards or downwards.