Chapter 16, Problem 1MCQ

To determine

The question requires us to determine the factor which causes the aggregate consumption function to shift.

Explanation of Solution

The aggregate consumption function represents the relationship between consumer spending and disposable income. Consumers use their disposable income for consumption purposes and savings purposes.

The shift in the aggregate consumption function will happen when a household’s consumption level will change due to factors other than current disposable income in an economy.

Any change in the expected future disposable income and aggregate wealth will change the household’s consumption level, and the changes in consumer spending will cause the aggregate consumption function to shift.

For example, when expected future disposable income increases, consumers will demand more goods and services in the current period, and thus, their consumption spending will increase. As a result, the aggregate consumption function will shift to the right.

Similarly, a rise in aggregate wealth will increase consumer spending and cause the aggregate consumption function to shift to the right.

Thus, option “a” is correct.

 The other options are incorrect because:

• A change in MPC will change the slope of the aggregate consumption function. 
• A change in current disposable income doesn’t change the current consumption level because consumers will consume a bare minimum level of goods and services even if they have to borrow.