Homework Help

True/False The sensitivity parameter in the consumption function that measures how...

user profile pic

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

Posted June 17, 2013 at 1:12 PM via web

dislike 1 like

True/False

The sensitivity parameter in the consumption function that measures how sensitive consumption is to change in consumer confidence is referred to as the marginal propensity to consume.

1 Answer | Add Yours

user profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 17, 2013 at 1:30 PM (Answer #1)

dislike 1 like

This statement is most likely to be true, though depending on how your teacher sees it, it could be false.  The consumption function is a function that shows how total consumption on the part of the household sector will vary as the level of income in the country as a whole changes.  The consumption function is shown in graphic form as a line on a graph.  On this graph, the vertical axis is consumption and the horizontal axis is income. 

The y-intercept for the line is the autonomous consumption.  This is the level of consumption that would occur if income were zero.

The slope of the line is the marginal propensity to consume (MPC).  In other words, the slope of the line is determined by how much of any income above zero will be spent and how much of it will be saved. 

I say that the statement is most likely to be true because the MPC does measure the impact of consumer confidence.  If consumers are confident, they are more likely to spend and the MPC goes up.  If they are not confident in the economy, they are more likely to save and the MPC goes down.  Thus, the MPC measures sensitivity to consumer confidence.

I say that it may not be true because this is not the only thing that the MPC measures.  It is also impacted by such things as real interest rates and wealth. 

Therefore, this statement is true unless you (or your teacher) read it to mean that MPC only measures sensitivity to consumer confidence.  It does measure that, but it also measures sensitivity to other things.

Sources:

Join to answer this question

Join a community of thousands of dedicated teachers and students.

Join eNotes