3. Consumption function and non-income determinants Aa Aa The following graph sh

Question

3. Consumption function and non-income determinants Aa Aa The following graph shows an economy's initial position at point B along its consumption function (CFy) REAL CONSUMPTION SPENDING CFx CFy REAL DISPOSABLE INCOME Suppose disposable income suddenly and unexpectedly decreases. The impact of this change is best represented by Suppose instead there is a stock market crash that wipes out a third of aggregate wealth. The impact of this change is best illustrated by movement from point B to point A movement from point B to point C a shift from CFy to CFx a shift from CFy to CFz

Explanation / Answer

If there is a sudden and unexpected decrease in the disposable income it will lead to a shift in the curve itself which can be best illustrated by a shift from CFy to CFz.

If there is a stock market crash that wipes out a third of aggregate wealth, it will lead to deacrease in the real consumption which can be best illustrated by movement from point B to point A.

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