Question

Suppose autonomous consumption increases. This increase in autonomous consumption will cause which of the following to occur? A) The consumption function becomes steeper. B) The consumption function becomes less steep. C) The consumption function shifts up. D) The consumption function shifts down.

Answer 1

Answer:

The correct answer is C) Consumption function shifts up

Explanation:

The consumption function is C = a + b x Yd

where:

• C = Total consumption
• a = autonomous consumption
• b x Yd = induced consumption

Autonomous consumption is consumption that does not depend on income. Even if your income is zero, you still have to engage in this type of consumption to survive (for example, food).

When you graph a consumption function, the Y axis represents total consumption and the X axis represents income. Autonomous consumption is located somewhere along the Y axis, with the X being zero. If Autonomous consumption increases, the point in the Y axis will move up, but the point in the x axis will still be zero, hence, the function will shift up.