1.The following graphs show an economy's initial position at point B along its consumption function CFCF. Suppose disposable income suddenly and unexpectedly decreases. On the graph, shift either the CF curve or the initial point on the CF curve to show the impact of a fall in disposable income. 2.Now suppose that tensions in the Middle East lead to a rapid increase in the price of oil, which raises the general price level. On the following graph, shift either the CF curve or the initial point on the CF curve to show the impact of a rise in the price level.
1.The following graphs show an economy's initial position at point B along its consumption function CFCF. Suppose disposable income suddenly and unexpectedly decreases. On the graph, shift either the CF curve or the initial point on the CF curve to show the impact of a fall in disposable income. 2.Now suppose that tensions in the Middle East lead to a rapid increase in the price of oil, which raises the general price level. On the following graph, shift either the CF curve or the initial point on the CF curve to show the impact of a rise in the price level.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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1.The following graphs show an economy's initial position at point B along its consumption function CFCF.
Suppose disposable income suddenly and unexpectedly decreases.
On the graph, shift either the CF curve or the initial point on the CF curve to show the impact of a fall in disposable income.
2.Now suppose that tensions in the Middle East lead to a rapid increase in the price of oil, which raises the general price level.
On the following graph, shift either the CF curve or the initial point on the CF curve to show the impact of a rise in the price level.
Transcribed Image Text:### Understanding the Impact of Disposable Income on Real Consumption Spending
On the graph below, you are tasked with shifting either the Consumption Function (CF) curve or the initial point on the CF curve to demonstrate how a decrease in disposable income affects real consumption spending.
#### Graph Explanation:
**Y-Axis:**
- The vertical axis represents Real Consumption Spending, measured in billions of dollars.
**X-Axis:**
- The horizontal axis represents Disposable Income, also measured in billions of dollars.
**Legend:**
- The graph includes two elements in the legend:
- **CF:** This represents the Consumption Function curve, which is showcased by an orange line.
- **A:** This point on the graph can likely be adjusted to show various levels of consumption based on changes to disposable income.
#### Graph Details:
- The Consumption Function (CF) is depicted as a straight orange line with a positive slope, indicating that as disposable income increases, real consumption spending also increases.
- A specific point on the CF curve is highlighted by a yellow-bordered black square, which could represent an initial level of disposable income and its corresponding consumption spending.
### Educational Use:
When learning about macroeconomics, it is crucial to understand how disposable income influences consumer spending. A decrease in disposable income should shift the initial point on the CF curve downwards along the curve, indicating less consumption at lower income levels. Alternatively, the entire CF curve could shift downwards if structural changes in the economy, such as increased savings rates or reduced consumer confidence, lead to lower consumption levels at all income tiers.
Use this interactive graph to observe and analyze the relationship between disposable income and consumption spending, thus gaining deeper insights into consumer behavior dynamics.
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