Question

The slope of the consumption function is

A. perfectly horizontal at the equilibrium level.
B. equal to 1.
C. equal to the MPC.
D. vertical at the full employment level of income.

Answer 1

The slope of the consumption function is equal to the Marginal Propensity to Consume (MPC), representing the change in consumption with a change in after-tax income.

Step-by-step explanation:

The slope of the consumption function is equal to the Marginal Propensity to Consume (MPC). The MPC indicates how much consumption will change with a change in after-tax income. If, for instance, the MPC is 0.9, this means that for each additional dollar of after-tax income, consumption will increase by 90 cents. In the provided example, the consumption function is represented as C = $20 + 0.9(Y - T), where Y is the national income and T is taxes. Thus, the slope of this consumption function is 0.9, reflecting the MPC value. Understanding the consumption function and MPC is crucial in the exposition of how consumption increases with the level of national income.