Question

with the aid of a properly labelled diagram, explain the three main characteristics of the consumption function

Answer 1

Answer on Question #70044 – Economics – Macroeconomics

Question:

with the aid of a properly labelled diagram, explain the three main characteristics of the consumption function

Answer:

The consumption function means a relationship between consumption and income.

Main characteristics of the consumption function:

1) There is autonomous consumption (a), even when the income is equal to 0, consumption is positive.

2) The slope of the consumption function is marginal propensity to consume (MPC)

$$MPC = \frac{\Delta C}{\Delta Y} - \text{the change in consumption over the change in income.}$$

3) $C(Y) = a + b^*Y$, where $b = \text{MPC}$

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