Final answer:
Wealth increases can be captured in the Income-Expenditure model by raising the level of autonomous consumption within the consumption function, which then shifts the aggregate demand function upward. This reflects higher initial consumption at zero national income, without necessarily changing the marginal propensity to consume.
Step-by-step explanation:
To capture the impact of an increase in wealth on the consumption function and the aggregate demand function in the Income-Expenditure model, we must consider how wealth affects consumer behavior. When households experience a rise in wealth, they are inclined to increase consumption. This can be represented in the consumption function by an increase in autonomous consumption, which refers to the level of consumption that would occur even with no income. If autonomous consumption is higher due to increased wealth, this translates into a higher initial consumption at a national income level of zero.
Moreover, the aggregate demand function, which includes consumption as one of its components, will shift upward due to this increase in consumption. The slope of the consumption function might remain the same if the marginal propensity to consume (MPC) remains constant. Hence, with each increase in income, consumption would still rise by the same proportion of that income change, but starting from a higher base level of consumption due to increased wealth.
For instance, if the consumption function initially indicated that with each $1,000 increase in income, consumption rises by $800 (an MPC of 0.8), the effect of increased wealth could result in a higher initial consumption level. Instead of starting at $600 at a national income level of zero, increased wealth might raise this figure to $800 or more, depending on the magnitude of the wealth increase.