Question

Which of the following statements about consumption spending is true?

Group of answer choices

an increase in wealth leads to a decrease in consumption

borrowing allows higher consumption in the present but causes lower consumption in the future

lower interest rates tend to decrease borrowing and consumption spending

an increase in saving leads to higher consumption

Answer 1

Option 2

borrowing allows higher consumption in the present but causes lower consumption in the future

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an increase in wealth leads to an increase in consumption as the higher wealth have higher assets to back the consumption.

borrowing allows higher consumption in the present but causes lower consumption in the future because the loan repayments decrease the future net income.

lower interest rates tend to increase borrowing and consumption spending as the lower interest rate has a lower opportunity cost of consumption and borrowing.

an increase in saving leads to decreases consumption as the MPC+MPS=1.

Saving and consumption are mutually exclusive parts of income so an increase in one decreases the other.