Suppose real disposable income increases by $500. Given this information, we know that
A) consumption will generally increase by exactly $500.
B) consumption will generally increase by less than $500.
C) consumption will generally increase by more than $500.
D) saving will generally increase by exactly $500.

Question

Quizplus · Accepted Answer

While an increase in disposable income should lead to an increase in consumption, individuals may choose to save some of that additional income or use it to pay off existing debts. Therefore, consumption will generally increase by less than the full amount of the increase in disposable income.

Suppose Real Disposable Income Increases by $500