Asked by: Ao Eirih
asked in category: General Last Updated: 23rd May, 2020

How does an increase in expected future income affect the consumption function?

= Marginal propensity to consume (MPC) = the increase in consumption which occurs from an increase in income (Y) of one unit will be between 0 and 1. An increase in expected future income will cause current consumption to increase the current saving to decrease.

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Just so, what effect does an increase in current income have on current consumption What effect does an increase in expected future income have on current consumption?

When the consumer gets an increase in expected future income, again both current and future consumption increase. Since current income does not increase, but current consumption does, saving decreases. When the consumer gets an increase in wealth, both current and future consumption again rise.

Secondly, what factors can cause the consumption function to shift? Shifts in the Consumption Function These factors include the following: o A change in interest rates – for example a cut in interest rates might boost consumption at each level of income and cause an upward shift in the consumption function.

In this regard, what happens increase consumption?

An increase of consumption raises GDP by the same amount, other things equal. Moreover, since current income (GDP) is an important determinant of consumption, the increase of income will be followed by a further rise in consumption: a positive feedback loop has been triggered between consumption and income.

How do changes in income affect consumption?

The income effect expresses the impact of changes in purchasing power on consumption, while the substitution effect describes how a change in relative prices can change the pattern of consumption of related goods that can substitute for one another.

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