Suppose real disposable income increases by $1,000. Given this information, we know that
A) consumption will generally increase by exactly $1,000.
B) consumption will generally increase by less than $1,000.
C) consumption will generally increase by more than $1,000.
D) saving will generally increase by exactly $1,000.

Question

Quizplus · Accepted Answer

Consumption is a function of disposable income, but it is not a one-to-one relationship. The consumption function has a slope less than one due to the presence of saving and taxes. Therefore, when disposable income increases by $1,000, consumption is likely to increase by less than $1,000.

Suppose Real Disposable Income Increases by $1,000