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True or false:  In a consumption function with income (Y) on the horizontal axis and...

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lilylee | Student, College Freshman | (Level 1) Salutatorian

Posted June 23, 2013 at 8:21 PM via web

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True or false:  In a consumption function with income (Y) on the horizontal axis and consumption (C) on the vertical axis, a rise in the price level (all else constant) will cause a shift upward of the consumption function.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 23, 2013 at 8:40 PM (Answer #1)

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This statement if false.  If the price level rises (if inflation occurs), the line representing the consumption function will actually shift downward.

The line that represents the consumption function shows us the relationship between disposable income and consumption.  In other words, it tells us how much we will consume at any given level of income.   An upward shift in this line would mean that we are spending more at every income level.  A downward shift would indicate that we are spending less.

If the price level rises, the average good or service that we could consume will become more expensive.  If the average good or service becomes more expensive, we will not be able to afford as many goods or services at a given income level.  This means that that the line will not shift upward.  Instead, it will shift downward because we will actually be buying less.

For this reason, the statement given in this question is false.

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