Explain what the consumption function shows, and describe what is held constant along the consumption function.

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Expert Solution

Consumption function shows the relationship between consumption and income.

It depicts that the demand for consumption goods is not constant but have a positive relationship with income . It tell us that if income rises , then consumption will also rise and vice versa .

Consumption function is expressed as

C = Co + cY

where C is consumption,

Y is income

Co is autonomous consumption which represents the consumption that even exists at zero level of income , or in other words it represents the minimum amount of consumption that will always exist even when income is zero . Hence autonomous consumption or C0 is held constant in consumption function .

Rahul Sunny answered 1 year ago

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