Question

Choose the answer that best explains the relationship between the consumption function and the savings function. O There is a positive relationship between shifts in the consumption and savings functions. O When the consumption function shifts, the savings function shifts in the opposite direction. O There is not a predictable relationship between the consumption function and the savings function. O Shifts in the consumption function will be reflected by a change in the marginal propensity to save, or MPS

Answer 1

The consumption function and savings function are inversely related; as the MPC increases and the consumption function gets steeper, the MPS decreases, making the savings function flatter, and vice versa.

Step-by-step explanation:

The relationship between the consumption function and the savings function is such that when one shifts, the other shifts in the opposite direction. This is because the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) must always add up to one. If, for instance, the MPC increases, indicating a steeper consumption function, the MPS must decrease, leading to a flatter savings function. Conversely, if the MPS increases, the consumption function becomes flatter as people save more out of an additional dollar of income. A shift in the consumption function due to factors such as changes in household preferences for saving will result in the entire consumption function becoming steeper or flatter, indicating a corresponding shift in the savings function.