If there were an increase in each of the following, which of them would cause an increase in the consumption function?a. Autonomous net taxesb. The interest ratec. Consumer optimism or confidenced....

If there were an increase in each of the following, which of them would cause an increase in the consumption function?

a. Autonomous net taxes
b. The interest rate
c. Consumer optimism or confidence
d. The price level

Asked on by xnoe323x

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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If all of the things that you mention in this question were to rise, only one of them would have a positive effect on the consumption function.  All of the others would cause consumption to decline.  Only an increase in consumer confidence would cause consumption to rise.

One way to express the consumption function is to say that consumption = autonomous consumption + (marginal propensity to consume x disposable income).  Autonomous consumption is what people would spend if they had no income.

If taxes increase, the value of the consumption function will go down.  This is because disposable income will go down.  If everything else stays the same in the equation above and the level of disposable income drops, consumption will drop.  The same is true of the price level.  If everything costs more, people will have less disposable income.  If interest rates go up, people will be less able to borrow money to spend on consumption.

On the other hand, if consumer confidence goes up, people will consume more.  The marginal propensity to consume will increase because people will be less worried about the future.  This will make them willing to spend more of what they make rather than saving it.  This will make the value of the consumption function rise. 

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