Question

Autonomous consumption expenditures are (LO5) a) equal to induced consumption expenditures b) proportional to disposable income c) not influenced by income d) influenced primarily by the saving function

Short answer

Autonomous consumption expenditures are not influenced by income. (Option c)

Step-by-step solution

Understanding Autonomous Consumption Expenditures

Autonomous consumption expenditures are the part of consumption expenditures that occur when income levels are zero. They are determined by factors like consumer confidence, government policies or programs, and other non-income related factors. In other words, these are the expenditures that occur regardless of the individual's or household's income level.

Analyzing each option

Let's analyze each option based on our understanding of autonomous consumption expenditures: a) equal to induced consumption expenditures: Induced consumption expenditures are the consumption that varies with the level of income. Thus, autonomous consumption expenditures are not equal to induced consumption expenditures. So, this option is incorrect. b) proportional to disposable income: Autonomous consumption expenditures are not related to income levels as they occur irrespective of individual's or household's income. Therefore, they are not proportional to disposable income. So, this option is also incorrect. c) not influenced by income: As mentioned earlier, autonomous consumption expenditures occur irrespective of an individual's or a household's income level. So, they are not influenced by income. This option seems to be correct. d) influenced primarily by the saving function: The saving function represents the relationship between saving and income. Autonomous consumption expenditures are not related to income; hence, they are not influenced primarily by the saving function. So, this option is incorrect.

Conclusion

Based on our analysis of each option, we can conclude that the correct answer is: c) Autonomous consumption expenditures are not influenced by income.

Key concepts

Induced Consumption

Induced consumption is a fundamental concept in understanding how people spend money based on their income changes. It signifies the portion of consumption that varies directly with changes in disposable income. When people earn more, their spending tends to increase because they have more money at their disposal. Conversely, if their income decreases, they often cut back on spending.

The relationship between induced consumption and income is typically described by the marginal propensity to consume (MPC). This represents the proportion of additional income that an individual is likely to spend on consumption rather than saving. For example, if the MPC is 0.8, it means that for every extra dollar of income, 80 cents will be spent on consumption.

Induced consumption is crucial because it helps economists predict how changes in income levels across an economy can affect overall consumption, economic growth, and government policy decisions.

• MPC shows how consumer spending changes with income changes.
• It provides valuable insights into economic cycles and individual behavior.
• Unlike autonomous consumption, induced consumption is directly linked to income.

Disposable Income

Disposable income is the amount of money individuals have available to spend and save after taxes have been deducted from their gross income. It is essentially the net income, which can be used for consumption and saving purposes. This figure is vital for understanding both individual financial health and the economic state of a country.

Disposable income determines how much money is left in the hands of consumers to allocate to various needs and wants. Higher disposable income generally leads to increased spending on goods and services, while lower disposable income may necessitate cutbacks.

Several factors affect disposable income, such as tax rates, government policies, wage levels, and employment rates. Policies that reduce taxes or boost wages can increase disposable income and, consequently, induced consumption.

• It is a key indicator of economic well-being.
• Affects both consumption levels and saving rates.
• Changes in disposable income directly influence consumer confidence and economic activities.

Saving Function

The saving function describes the relationship between the level of saving and the level of income. It is an essential economic concept that helps to understand how much income households want to save rather than consume. As disposable income rises, the amount saved often increases. This is because consumers may not increase their consumption in direct proportion to their income gains, leading to more savings.

The saving function typically complements the consumption function, illustrating the trade-off between consumption and saving. The saving function can be represented in a simple formula: \[ S = Y - C \]where \(S\) represents saving, \(Y\) represents disposable income, and \(C\) represents consumption.

Understanding the saving function helps policymakers predict how changes in economic policies will affect saving rates. For example, a policy that enhances disposable income can lead to higher savings if individuals opt to save the additional income rather than spend it entirely.

• Illustrates the trade-off between consumption and saving.
• Helps in gauging economic stability and growth potential.
• Key for understanding long-term investments and economic sustainability.