Question number 4 thank you c. Saving Consumption expenditure is disposable inco

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Question number 4 thank you

c. Saving Consumption expenditure is disposable income. (greater than/less than/equal to) 4. In the situations below, determine whether the consumption function (CF) will increase/decrease and which way the CF curve will shift upward/downward. Additionally, be able to identify each situation on a consumption function graph. Refer to Figure 14.3. a. an increase in expected future income CF (increases/decreases); CF curve shifts (rightward/leftward). b. a decrease in wealth . CF (increases/decreases); CF curve shifts (rightward/leftward). 5. Expenditures that respond to changes in real GDP are known as?

Explanation / Answer

4.a) an increase in expected future income - CF increases, CF curve shifts leftward from CF0 to CF1. Consumption decisions may depend not only on the current income but also on the expected future income. This happens when a consumer is certain or is sure about his future income flows i.e how much he is going to earn in the future. Higher expected future income is likely to lead the consumer to increase current consumption and reduce current saving.

4. b) a decrease in wealth

- CF decreases ,CF function shifts rightward from CF0 to CF2. A decrease in wealth leads to decrease in the consumption and vice versa. The change in the level of wealth has a direct effect on the level of consumption. When there is a decrease in the value of assets or stock or share prices ,a person feels less wealthy and he will spend less on consumption.

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