Chapter 16, Problem 2MCQ

To determine

The question requires us to determine the slope of the consumption function.

Explanation of Solution

In a consumption spending function,

  ${\text{C=<mover accent="true"><mo>C</mo><mo>¯</mo></mover><mo>+cY</mo>}}_{\text{D}}$

• $\text{<mover accent="true"><mo>C</mo><mo>¯</mo></mover>}$ is the autonomous consumption level
• c is the marginal propensity to consume which represents the slope of the consumption function.
• ${\text{Y}}_{\text{D}}$ is the disposable income.

The marginal propensity to consume is the slope of a consumption function.

Since the consumption function represents the relationship between disposable income and level of consumption. Generally, the slope is the ratio of the change in the vertical intercept to the change in the horizontal intercept.

So, the slope of consumption function or MPC is the ratio of change in consumer spending to the change in disposable income.

  $\text{MPC = }\frac{\text{Change in consumer spending}}{\text{Change in disposable income}}$

Therefore, “c” is the correct option.

The other options are incorrect because

• The real interest rate and inflation rate are not directly related to the consumption function.
• The tax rate is directly related to the disposable income which, in turn, is directly related to the consumption function.

None of them show the ratio of change in consumer spending to disposable income.