Answer to Question #242001 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) Increase in disposable income will lead to movement along consumption function curve. Change in income will will lead to a shift in consumption function curve because people will spend more. Changes in interest rate will cause a shift in investment function curve.

b) Increase in disposable income will cause an upward movement along the consumption function curve.

Decrease in wealth will shift the consumption function curve leftward. Fall in stock prices will also shift the consumption function curve rightward.

c)There will be a down ward shift of the curve due to decline in expected economic activity .

A rise in interest rate will lead to a movement along the demand curve of investment.