Correct Option
The correct option is 2 and 3 only.
Explanation
The consumption function expresses the functional relationship between total consumption expenditure and gross national income in an economy. In Keynesian macroeconomics, it is typically represented by the linear equation:
C = C̅ + cY
Where C is total consumption, C̅ is autonomous consumption, c is the marginal propensity to consume (MPC), and Y is income.
Statement-wise Analysis
- Statement 1 is Incorrect. Autonomous consumption (C̅) refers to the mandatory level of consumption expenditure required to sustain basic life (such as food and shelter) even when income is zero. It is independent of the level of income and is financed through past savings or borrowing, not solely when income is positive.
- Statement 2 is Correct. Induced consumption (cY) is the portion of consumption expenditure that is dependent on the level of disposable income. It varies directly with income; as income rises, induced consumption rises, and as income falls, it decreases.
- Statement 3 is Correct. The Marginal Propensity to Consume (MPC), denoted as 'c' in the equation, measures the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. It represents the slope of the consumption function and determines the rate at which induced consumption changes in response to a change in income.
Key Takeaway: The aggregate consumption function comprises two parts: autonomous consumption, which is fixed and occurs at zero income, and induced consumption, which fluctuates based on income levels and the Marginal Propensity to Consume (MPC).