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In a closed economy the consumption function is

In a closed economy the consumption function is

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Answer #1

The functional relationship between C and Y is called consumption function. It helps us to understand how C behaves with respect to Y. Also, it helps us to estimate C corresponding to different values of Y in the economy.

Algebraically, consumption function is expressed as in the following equation: C = c + bY.

c in this equation refers to the minimum level of consumption. It is the value of consumption when Y = 0. The parameter b refers to the rate at which C Increases in response to an increase in Y. It is the marginal propensity to Consume. Y is the income.

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