Question

In the dynamic multiplier model, consumption in any period depends on ______.

Options

• Income of the same period

• Income of the next period

• Income of the previous period

• Total accumulated savings

Answer 1

In the dynamic multiplier model, consumption in any period depends on income of the previous period.

Explanation:

A key assumption of the dynamic multiplier is that consumption depends on the previous period's income, i.e., Cₜ = f(Yₜ₋₁). This means there is a one-period consumption lag, what you earn in one period determines what you spend in the next.