Question

What is Consumption Function?

Hint:

The Consumption Function is often expressed as: \( C = C_0 + cY \), where \(C_0\) is autonomous consumption, \(c\) is the marginal propensity to consume, and \(Y\) is income.

Answer 1

The Consumption Function shows the relationship between aggregate income and total consumption in an economy. It illustrates how consumption changes as income varies, generally with consumption increasing as income rises. The function is a key concept in Keynesian economics, where consumption depends on both autonomous consumption (independent of income) and induced consumption (dependent on income). The Marginal Propensity to Consume (MPC) determines the fraction of additional income spent on consumption.