Question

The amount of consumption in an economy correlates

A)inversely with the level of disposable income
B)directly with the level of disposable income
C)directly with the level of saving
D)directly with the rate of interes

Answer 1

Consumption in an economy directly correlates with the level of disposable income, as observed in economic patterns where both metrics have grown together over time.

Step-by-step explanation:

The amount of consumption in an economy correlates directly with the level of disposable income. This relationship is evident in the patterns seen in historical data, such as the period from 1962 to 2010, where both consumption and disposable income grew significantly.

The average propensity to consume, calculated as consumption divided by disposable income, tends to decrease as disposable income increases, indicating that while consumption grows with higher income, it does so at a declining rate relative to income.

In contrast, the savings rate tends to increase, as a decline in the average propensity to consume means that households are saving a larger fraction of their income. In the expenditure-output model, the consumption function shows that for every increase in national income, consumption increases by the marginal propensity to consume.