Answer to Question #251813 in Macroeconomics for Gcina

Question

diagram to explain the three main characteristics of the consumption function.

Answer 1

Consumption is primarily determined by the level of disposable income 

(Yd). Higher Yd, leads to higher consumer spending.

This model suggests that as income rises, consumer spending will rise. However, 

spending will increase at a lower rate than income.

At low incomes, people will spend a high proportion of their income. The average 

propensity to consume could be one or greater than one. This means people spend 

everything they have. When you have low income, you don’t have the luxury of being 

able to save. You need to spend everything you have on essentials.

However, as incomes rise, people can afford the luxury of saving a higher proportion of 

their income. Therefore, as income rise, spending increases at a lower rate than

 disposable income. People with high incomes have a lower average propensity to spend.