posted by Sally on .
Problem #2: A Consumption Function: C = Co + MPC(Yd). Suppose that autonomous consumption is inversely related to the interest rate. It follows that as…
a. interest rate falls, consumption falls
b. interest rate rises, saving falls
c. interest rate rises, consumption falls
d. disposable income rises, autonomous consumption rises
e. none of the above
The answer I learned was C. So does the consumption refer to autonomous consumption.
Autonomous consumption is your Co term. Answer c. is correct; as r rises, Co falls, therefore C falls.