Answer to Question #251977 in Macroeconomics for liam

Question

Use a diagram to explain the three main characteristics of the consumption

function.

Answer 1

The three characteristics of consumption function are

1. The level of income - most poor people will not be able to save because they spend a big proportion of their income on consumption goods. therefore household income must have a minimum level for them to be able to save.

2. Wealth or current income - if the household wealth is below the critical ( break-even ) level people will tend to spend more than their current income either by borrowing or using their savings. Therefore this process should have a limit by observing consumption behaviors because the savings may exhaust soon or later and the family will remain in total poverty.

3. When the income crosses the break-even level, people plan to consume a little portion of their income and save the rest. Accordingly in the increase in household income increases the consumption rate but not proportionately.