Which concept explains why consumption tends to rise when income rises?

Which concept explains why consumption tends to rise when income rises?

• A. Paradox of thrift
• B. Demand-pull inflation
• C. Marginal propensity to consume
• D. Say's law

Answer: (C)

The idea being tested is the marginal propensity to consume, which measures how much of an extra unit of income households spend. If income rises by an amount ΔY and the MPC is c, then consumption increases by ΔC = c × ΔY. So when income goes up, people spend a portion of that additional income, causing consumption to rise even if prices don’t change. For example, with an MPC of 0.8, a £100 increase in income leads to £80 more in consumption. This relationship is central to the consumption function C = a + cY, showing how consumption depends on income. In contrast, the paradox of thrift focuses on saving behavior reducing overall demand during downturns, Say’s law links supply to demand in a broad sense, and demand-pull inflation concerns rising prices from excess demand. The marginal propensity to consume best explains why consumption moves up when income does.

The idea being tested is the marginal propensity to consume, which measures how much of an extra unit of income households spend. If income rises by an amount ΔY and the MPC is c, then consumption increases by ΔC = c × ΔY. So when income goes up, people spend a portion of that additional income, causing consumption to rise even if prices don’t change. For example, with an MPC of 0.8, a £100 increase in income leads to £80 more in consumption. This relationship is central to the consumption function C = a + cY, showing how consumption depends on income. In contrast, the paradox of thrift focuses on saving behavior reducing overall demand during downturns, Say’s law links supply to demand in a broad sense, and demand-pull inflation concerns rising prices from excess demand. The marginal propensity to consume best explains why consumption moves up when income does.