If autonomous consumption a rises in C = a + bY while b remains constant, what happens to equilibrium income?
Answer and explanation
Correct answer: Income will rise
In the consumption function C = a + bY, a represents autonomous consumption and b represents the marginal propensity to consume. When a increases while b remains unchanged, planned consumption and aggregate expenditure increase at every income level. Through the multiplier process, firms receive higher sales and equilibrium output and income rise. Therefore option A is correct.
Frequently asked questions
What is the correct answer to this question?
Income will rise
Why is this the correct answer?
In the consumption function C = a + bY, a represents autonomous consumption and b represents the marginal propensity to consume. When a increases while b remains unchanged, planned consumption and aggregate expenditure increase at every income level. Through the multiplier process, firms receive higher sales and equilibrium output and income rise. Therefore option A is correct.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates.
