Question 3 Suppose there is an increase in expected future income. Everything else held constant, this...

Question 3

Suppose there is an increase in expected future income. Everything else held constant, this will change the ______ and the consumption function will _____.

Question 3 options:

	autonomous consumption component; shift down
	autonomous consumption component; shift up
	marginal propensity to consume; shift down
	marginal propensity to consume; shift up

Solutions

Expert Solution

Marginal propensity to consume

Shift up

Explanation:

The autonomous component of the consumption refers the consumptions that are are essential, this consumptions occur at any level of income, even when there is low level of income the consumers cannot cut this amount of consumption.

On the other hand marginal propensity to consume measures the change in consumption due to unit change in income. As income increases consumption also increases and marginal propensity to consume captures this part.

Sum of marginal propensity to consume and marginal propensity to save is equals to 1. This means that each unit of income is either saved or consumed.

If there is an expected increase in in future income then the consumers will save less for the future. And as a result marginal propensity to save will decrease and marginal propensity to consume will increase.

As marginal propensity to consume will increase people will consume more goods as a result consumption function which shift upward.

Rahul Sunny answered 1 year ago

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