If consumption were a direct function of disposable income, how would a decrease in personal taxes or an increase in transfer payments affect consumption?
Consumption would increase if personal taxes decreased since this would increase disposable income (total income would not have changed as a result of the taxes). An increase in transfer payment income would also similarly cause an increase in consumption.
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When the Fed buys a U.S. bond in the open market
A) its action contracts total reserves and the money supply. B) total reserves increase by the amount of the purchase but the money supply stays the same. C) its action expands total reserves and the money supply. D) its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another.
Which of the following would have the greatest positive impact on a country's domestic economy?
A) An increase in spending on imports from other countries. B) An increase in spending by foreigners on the country's exports. C) A decrease in the confidence of foreign investors in the country's economy. D) A decrease in the incomes of consumers in foreign countries.