A decrease in stock prices alters the consumption function by:
A) increasing the mpc.
B) decreasing the mpc.
C) increasing the constant term.
D) decreasing the constant term.

Question

Quizplus · Accepted Answer

A decrease in stock prices can lead to a decrease in consumer wealth, which can result in a decrease in consumption. This would be reflected in the constant term of the consumption function, which represents the level of consumption that would occur even in the absence of income. Therefore, decreasing the constant term would make the consumption function represent a decrease in overall consumption levels due to the decrease in stock prices.

A Decrease in Stock Prices Alters the Consumption Function By