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The consumption function

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1. How would an increase in each of the following affect the consumption function? How would it affect the savings function? (a) net taxes (b) the interest rate (c)consumer optimism or confidence (d) the price level (e) consumers' net wealth (f) disposable income

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The consumption function is a function that relates consumption to autonomous consumption and disposable income. In the general format it is given by,

C = AC + MPC*DY,

where, C is consumption, AC is autonomous consumption (consumption when income is zero), MPC is the marginal propensity to consume, and DY is the disposable income. Any change in AC, MPC, or DY will change the consumption function.

a. Net Taxes: Net taxes is equal to Taxes - Transfer Payments. Also, disposable income is defined to be

DY = Y - Taxes + Transfer Payments = Y - (Taxes - Transfer Payments) = Y - Net Taxes, where Y is total income.

Hence, if net taxes go ...

Solution Summary

The consumption function is exemplified.

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(MPC and MPS)

If consumption increases by $12 billion when real disposable income increases by $15 billion, What is the value of the MPC? What is the relationship between the MPC and the MPS? If the MPC rises, what must happen to the MPS? How is the MPC related to the consumption function? How is the MPS related to the saving function?

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