Recent work on the consumption function suggests that consumption depends on:
A) current income alone.
B) current income and expected future income.
C) current income, expected future income, and interest rates.
D) current income, expected future income, interest rates, and wealth.

Question

Quizplus · Accepted Answer

Recent work on the consumption function has shown that consumption depends on current income, expected future income, interest rates, and wealth. This is because households tend to save more when their current income is high, but also when they expect their future income to be high. Interest rates also play a role in consumption decisions, as higher interest rates encourage saving over spending. Finally, households with higher levels of wealth may be more willing to spend on consumption, as they have a greater ability to absorb financial shocks.

Recent Work on the Consumption Function Suggests That Consumption Depends