Which of the following functions might be an appropriate representation of a consumption function that reflects the implications of the forward-looking theory of consumption? In each, C represents consumption, Y represents income, and R represents the interest rate expressed in terms of a decimal fraction.
A) C = 230 + 0.71Y + 1,000R.
B) C = 420 + 1.3Y - 1,000R.
C) C = 276 - 1.3Y - 1,000R.
D) C = 350 + 0.65Y - 1,500R.
E) C = 220 - 0.73Y + 1,500R.

Question

Quizplus · Accepted Answer

The forward-looking theory of consumption suggests that consumption depends positively on income and negatively on the interest rate. Option D reflects this with a positive coefficient for Y and a negative coefficient for R.

Which of the Following Functions Might Be an Appropriate Representation