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CA Foundation · Business Economics · Determination of National Income

Which of the following is most likely to cause an upward parallel shift of the entire consumption function, rather than a movement along it?

A rise in household wealth shifts the consumption function upward. Wealth is a non-income determinant that raises autonomous consumption at every income level, whereas changes in national income only move the economy along the existing consumption function.

  1. AA rise in national income
  2. BA rise in household wealth due to higher asset pricesCorrect
  3. CA fall in national income
  4. DA rise in the marginal propensity to save along the same line

Explanation

Changes in income cause movements along the consumption function. Non-income factors such as wealth, expectations or credit availability change autonomous consumption and shift the curve. Higher wealth raises the intercept, shifting the function upward.

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