Question

Which of the following events will cause the slope of the consumption function to be steeper?
1. A decrease in the marginal propensity to save
2. An increase in disposable income
3. An unforeseen increase in inventories
4. An increase in real GDP
5. Exercise on the consumption and saving function

Answer 1

Consumption function is given by :

C = Co + cY where Co = autonomous consumption, c = Marginal propensity to consume(MPC) and Y = disposable income

Slope of consumption function = dC/dY = c i.e. MPC

So, Slope of consumption function will be steeper when MPC increases.

As, MPC + MPS = 1 where MPS = Marginal Propenity to save

=> MPC = 1 - MPS. So As MPS decreases, MPC will increase and thus Slope of consumption function will be steeper when MPS decreases. Thus option (1) is the correct answer

Hence, the correct answer is (1) A decrease in the marginal propensity to save.