1. Indicate whether each of the following events will cause a shift or a movemen

Question

1. Indicate whether each of the following events will cause a shift or a movement along the consumption function for the Simpson family. If the event shifts the consumption function, indicate whether the consumption function will shift upward or downward.

(a) A decrease in income tax.

(b) The Simpson family win a lottery of $1,000,000.

(c) As a result of the recent economic downturn, the Simpson family is not very optimistic about the future.

(d) Mr. Simpson receive a pay raise of $10,000. (e) A decline in interest rate.

Explanation / Answer

a) shifts the curve upward

b) income increases so shifts the curve upward

c) lower expections, shifts the curve downward

d) shifts curve upwards as income increases

c) decline in interest rate will reduce the savings and increase the present consumption. There is a no direct relation but curve will shift upward.

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