Answer to Question #241978 in Macroeconomics for vie

Question

In working with the consumption function and the investment demand schedule, we need to distinguish between shifts of and movements along these schedules. a. Defi ne carefully for both curves changes that would lead to shifts of and those that would produce movements along the schedules. b. For the following, explain verbally and show in a diagram whether they are shifts of or movements along the consumption function: increase in disposable income, decrease in wealth, fall in stock prices. c. For the following, explain in words and show in a diagram whether they are shifts of or movements along the investment demand curve: expectation of a decline in output next year, rise of interest rates, increase in taxes on profi ts. 

Answer 1

a.      Changes in disposable income generate movement along the consumption function; changes in everything that would cause people to spend more of their incomes at each and every level of income would cause the function to shift.an example is feeling that savings goals had been met and increased optimism about future incomes. Changes in the real interest rate generate movement along the investment demand curve; changes in business optimism or anything else that would cause people to invest more at each and every interest rate would cause the function to shift (because more projects would be judged profitable).

b.     An increase in disposable income would create a movement up along a consumption function. Reduced wealth would shift the consumption function down.

c.      Higher real interest rates would cause movement along the demand curve for investment. A decline in expected economic activity would shift the curve down.