Question

When a person receives an increase in wealth, what is likely to happen to consumption and saving?

Answer 1

When a person receives an increase in wealth, Consumption increases and saving decreases

Both present and future consumption rises as a consumer's current income does as well. Savings increase because current spending increases but does so at a slower rate than current income growth. Again, both present and future consumption rises when the customer receives an increase in predicted future income.

Savings declines because current consumption rises while current income does not. Current and future consumption both grow when the consumer's wealth increases. Again, because current income has not increased, saving has decreased. These individual actions to adjust one's consumption and saving habits have a cumulative effect on the aggregate amount of desired consumption and saving.

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