University of Central Florida (UCF) ECO2013 Principles of Macroeconomics Practice Exam 3

The consumption function primarily focuses on the relationship between current income and consumer spending. According to this concept, individuals base their consumption expenditures largely on the amount of income they currently have, reflecting a direct link between income levels and consumption patterns. This relationship is often represented by the equation: C = a + bY, where C represents consumption, a represents autonomous consumption (consumption when income is zero), b is the marginal propensity to consume, and Y is current income.

While expected future income and wealth, shifts in aggregate demand, and interest rate behavior can influence consumption indirectly, they are not the fundamental basis of the consumption function itself. The core premise is that a change in current income leads to a corresponding change in consumption levels, which is why it is considered a function of current income. This concept helps economists understand spending behaviors and how they react to changes in income, making it a crucial component in macroeconomic analysis.