The positive slope of the consumption function indicates that
A) the amount of household wealth is subject to change.
B) when prices fall consumers spend more.
C) consumers increase their total consumption expenditure when disposable income increases.
D) consumers spend less out of each extra dollar of income.

Question

Quizplus · Accepted Answer

The positive slope of the consumption function indicates that as disposable income increases, consumers increase their total consumption expenditure. This means that consumption and income are positively related, which is consistent with the positive slope. Option A is not correct as household wealth is not necessarily included in the consumption function but rather in the wealth effect. Option B is incorrect as falling prices may lead to an increase in purchasing power, but it does not necessarily mean that consumers will spend more. Option D is incorrect since the marginal propensity to consume (MPC) is the fraction of additional income that is spent, and it is reflected in the slope of the consumption function. A positive slope implies a positive MPC.

The Positive Slope of the Consumption Function Indicates That