If the stock market falls by 25 percent next year and remains down, what is most likely to happen to the consumption function?
A)It will shift upward.
B)It will shift downward.
C)It will not shift, but people will move downward along the consumption function.
D)It will not shift, but people will move upward along the consumption function.

Question

Quizplus · Accepted Answer

A fall in the stock market is likely to reduce households' wealth and income, leading to a decrease in their consumption spending. As a result, the consumption function is likely to shift downward. This shift shows a decrease in the marginal propensity to consume, or MPC, that may be attributed to lower expected income, declining wealth, or increased uncertainty. The shift might also be accompanied by a change in autonomous consumption, such as reduced government transfers or increased taxes. It is possible that, in the short run, people may continue to follow their previous consumption patterns by dipping into their savings or borrowing more, but over time, the consumption function is likely to adjust to reflect the new economic realities.

If the Stock Market Falls by 25 Percent Next Year