Answer to Question #242006 in Macroeconomics for vie

Question

“Changes in disposable income lead to movements along the consumption function; changes in wealth or other factors lead to a shift of the consumption function.” Explain this statement with an illustration of each case. 

Answer 1

In the first case, when income increases, consumption rises since marginal propensity to consume (MPC) becomes positive which makes the consumption function to slope upwards.

Wealth and other factors are determinants of consumption function. So when they change they make the curves to shift. For instance, when real wealth increases, the consumption function shifts upwards and a reduction in wealth shifts it downwards.