Question

The consumption function, expressed in terms of disposable income, is written as:

Options

• \[C=\overline{C}+c(Y+T+\overline{TR})\]

• \[C=\overline{C}+cY_D=\overline{C}+c(Y-T+\overline{TR})\]

• \[C=\overline{C}-cY_D=\overline{C}-c(Y+T-\overline{TR})\]

• \[C=c\overline{C}+Y_D=c\overline{C}+(Y-T+\overline{TR})\]

Answer 1

The consumption function is \[C=\overline{C}+cY_D\], where \[\overline{C}\] is autonomous consumption and c is the marginal propensity to consume. Substituting \[Y_D=Y-T+\overline{TR}\] gives \[C=\overline{C}+c(Y-T+\overline{TR})\].