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Effects of an Open Economy

Consumption f...

Question

Consumption function is the functional relationship between and .

A

Consumption, Aggregate demand

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B

Consumption, National Income

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C

Aggregate Demand, Aggregate Supply

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D

National Income, Private Income

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Solution

The correct option is D Consumption, National Income
Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value.
C= c+ bY where c=autonomous consumption, b= marginal propensity to consume, and Y= income.

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Q. State whether the following statements are true or false.
1. Consumption expenditure is the only component of aggregate demand.
2. The difference between a country's exports and imports is termed as net earnings from foreign transactions.
3. Autonomous consumption is income elastic.
4. The equality between aggregate demand and aggregate supply determines the equilibrium level of employment.
5. At breakeven point Consumption (C) is equal to income (Y).

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