When stock prices fall significantly,people may feel less wealthy and thus decide to consume less of their current flow of disposable income.In our consumption function,this can be represented by a
A)fall in (Y -T).
B)rise in T.
C)rise in c.
D)fall in a.

Question

Quizplus · Accepted Answer

The consumption function typically includes a term that represents autonomous consumption (often denoted as "a" or "c0"), which is the consumption level when income is zero. A fall in perceived wealth, such as from declining stock prices, would likely decrease autonomous consumption as people feel less wealthy and decide to consume less, regardless of their current income. This is represented by a fall in "a" in the consumption function, not by changes in disposable income (Y - T), taxes (T), or the marginal propensity to consume (c).

When Stock Prices Fall Significantly,people May Feel Less Wealthy and Thus