Question

2. Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? Explain two reasons why the C curve would shift downward (answer in your own words)

Answer 1

A consumption schedule is table showing the relation between consumption expenditures and income of a household .

A saving schedule is table showing the relation between saving and income of the household .

income of a housheold can be used in two ways: either it can be saved or it can be consumed

If consumption is more out of income, savings are necessarily less. And if consumption is less, savings will be more. This being so, when your consumption schedule shifts upward (meaning you are consuming more out of any given income), your saving schedule shifts downward (meaning you are consuming less out of the same given income).

Consumption curve is a curve in which the quantities of two goods are plotted on the two axes; the curve is the locus of points showing the consumption bundles chosen at each of various levels of income.

Shifting of the Consumption Curve

When consumption and savings priorities change, then the existing curve shifts.The curve shifts when other determinants of consumption change. Examples of changes that could shift the consumption function are changes in real wealth and changes in expectations.

An decrease in stock and bond prices, for example, would make holders of these assets poorer , and they would be likely to decrease their consumption. A reduction in real wealth shifts it downward.

A change in the price level changes real wealth. The relationship among the price level, real wealth, and consumption is called the wealth effect. An increase in the price level decreases real wealth shifts the curve downward.

Expectations

If consumers expect economic conditions to worsen, they will cut their consumption—and economic conditions will worsen.an increase in pessimism tends to shifts it downward