Page 76 - Macroeconomics. book docx_Neat

The main determinants of consumption include:

- Income (primary determinant)

- Wealth

- Interest rates

- Expectations about future income

- Taxes and government policies

Cultural and social factors

6. Relationship Between Consumption and Income

There is a positive relationship between income and consumption.

As income increases, consumption increases, but by a smaller amount. The remaining

part of income is saved.

7. Consumption Function

The consumption function shows the relationship between consumption and income.

C = a + bY

Where:
a = Autonomous consumption

b = Marginal Propensity to Consume (MPC)

Y = Income

8. Saving and Consumption

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