When the economy enters an expansion of a business cycle, households become more optimistic about expected future disposable income. The increase in optimism leads to
A) a shift upward of the consumption function.
B) a movement downward along the consumption function.
C) a movement upward along the consumption function.
D) an increase in consumption expenditures.
E) no change in the level of consumption expenditures.

Question

Quizplus · Accepted Answer

When households become more optimistic about future income, they are likely to increase their current consumption at any given level of current income, leading to an upward shift of the consumption function.

When the Economy Enters an Expansion of a Business Cycle