Ando and Modigliani postulated a consumption function depending on not only disposable income but also the value of assets in which people keep their wealth. The estimated coefficient for asset value
A) emerged in the neighborhood of 0.06, pretty close to the marginal propensity to consume that the theory might predict for temporary changes in income.
B) emerged in the neighborhood of 0.7, a little low for the propensity to consume that the theory would predict for permanent changes in income.
C) emerged as expected on the basis of theory in the 0.05 range, but the estimated marginal propensity to consume out of income was a bit low, in the 0.7 range.
D) a and c.
E) none of the above.

Question

Quizplus · Accepted Answer

Ando and Modigliani's theory on the consumption function suggests that both disposable income and asset values influence consumption. The correct answers, A and C, reflect aspects of their findings: the coefficient for asset value being around 0.06, aligning with theoretical predictions for temporary income changes, and the marginal propensity to consume out of income being lower than expected, at around 0.7.

Ando and Modigliani Postulated a Consumption Function Depending on Not