Answer to Question #227093 in Macroeconomics for KAT

Question

Define consumption also list and explain components of

consumption function. 

Answer 1

Consumption in economics is the use of goods and services by households. Consumption function in economics is the relationship between consumer spending and the various factors determining it.

The factors include;

1) Money income -the money income of an individual is a determinant factor in determining his/her consumption. Savings, income and consumption are related to each other.

2) Rate of interest - if the interest rate rises, people will consume less and save more which makes advantage of higher interest rate and if the interest rate decreases the people will consume more and save less.

3) Fiscal policy -the fiscal policy of the government relating to expenditure, taxation and public debt will considerably affect the tendency of consumption.