Consider the little country of Podunk. Many different economic variables influen
ID: 1106715 • Letter: C
Question
Consider the little country of Podunk. Many different economic variables influence the consumption decisions Podunkians make. Match each statement with the change it would produce on Podunk's consumption functior. FlatterShift UpShift DownSteeper Shft Down 1. Consumers are worried the looming 'fiscal cliff will push the economy into a recession 2. Consumer spending patterns change and consumers save a smaller portion of new disposable income on consumption than in the past. 3. After several years in a deep recession, the latest projections from the Podunk Economic Council show the economy at last on an up-swing. Happy days are here again! 4. Prices on the Podunk Stock Exchange increase. 5. Consumer spending patterns change and consumers save a greater portion of new disposable income on consumption than in the past. 6. Interest rates increase, reducing the amount Podunkians are willing to borrow.Explanation / Answer
1. Shift down
As now people would consume less and save more.
2. Steeper.
Slope of consumption function is MPC, marginal propensity to consume. If the consumers save little on consumption, then the MPC would decrease, making the curve steep.
3. Shift up.
Consumption would rise with the positive expectations.
4. Shift up.
When prices of stocks rises, more income is earned by the consumers and the consumption would increase.
5. Flatter.
MPC would increase in this case.
6. Shift down
When less amount is willing to borrow, then consumers would consume less good and services.