Understanding the Consumption Function

The video introduces the concept of a consumption function, explaining how aggregate income in an economy can drive aggregate consumption. It constructs a hypothetical consumption function, discussing base consumption levels and the role of disposable income. The video also visualizes the function as a graph, highlighting the relationship between consumption and disposable income. Different models of consumption functions are explored, emphasizing the marginal propensity to consume and how it may vary with income levels.

What is the primary idea behind a consumption function?

• It describes how investments affect economic growth.

• It explains the relationship between taxes and government spending.

• It illustrates how aggregate income influences aggregate consumption.

• It shows how savings drive consumption.

In the hypothetical consumption function, what is the base level of consumption?

• 100

• 500

• 1500

• 1000

What percentage of disposable income is spent in the hypothetical model?

• 70%

• 40%

• 60%

• 50%

What is the difference between income and disposable income?

• Disposable income is income before taxes.

• Disposable income is income after taxes.

• Disposable income is income after investments.

• Disposable income is income after savings.

Why is disposable income used in the consumption function instead of total income?

• Because it includes savings.

• Because it excludes government spending.

• Because it excludes taxes.

• Because it includes investments.

What does the slope of the consumption function represent?

• The marginal propensity to save.

• The total income of the economy.

• The base level of consumption.

• The marginal propensity to consume.

In the graph of the consumption function, what does the y-intercept represent?

• The marginal propensity to consume.

• The disposable income.

• The base level of consumption.

• The total income.

How does the marginal propensity to consume change with income levels?

• It increases as income increases.

• It decreases as income increases.

• It fluctuates randomly.

• It remains constant regardless of income.

What happens to consumption as people become richer according to the discussion?

• They spend a higher fraction of their income.

• They spend a lower fraction of their income.

• Their consumption decreases.

• Their consumption remains constant.

What is a possible reason for a high marginal propensity to consume at low income levels?

• People have excess disposable income.

• People need to improve their standard of living.

• People want to save more.

• People have a high standard of living.