Does an interest rate change cause a movement along or a shift in the consumption function?

1)Does an interest rate change cause a movement along or a shift in the consumption function?


2) How does reduced sensitivity of consumption spending to interest rate changes likely make real GDP less volatile in the face of variations in market interest rates? (hint: if autonomous consumption is less responsive to interest rate changes, what must be true of variations in equilibrium real gdp in the face of those interest rate changes?)|||yes.it does ,


When consumption increases, the graph shifts up. When consumption decreases, the graft shifts down.





WEALTH causes direct shifts: an increase in wealth causes an upward shift of consumption


EXPECTATIONS cause direct shifts: optimism causes upward consumption shifts, while pessimism causes downward consumption shifts


INTEREST RATES cause inverse shifts: as interest rates rise, consumption decreases and vice verse.





Most of these variables tend to remain stable in the short run, however, so economists suspect that changes in consumption are not the root cause of the fluctuations we witness in business cycles.











There are other theories about consumption other than the one we have just learned about!


Modigliani and Friedman both came up with similar theories that suggest that consumption is a function of someones average lifelong income, rather than current disposable income. This accounts for consumption which continues to remain high after retirement- current disposable income is very low for retirees, but they are able to live off of some stockpiled income from their income throughout the rest of their lives.