ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -What Determines the Level of Consumption? Unsurprisingly the main factor is the level of disposable income. The more we have, the more we spend. So economic growth, leading to higher GDP and therefore household incomes is likely to result in higher consumption.

Detailed explanation-2: -An increase in disposable income will cause a direct increase in consumption spending.

Detailed explanation-3: -An increase of consumption raises GDP by the same amount, other things equal. Moreover, since current income (GDP) is an important determinant of consumption, the increase of income will be followed by a further rise in consumption: a positive feedback loop has been triggered between consumption and income.

Detailed explanation-4: -Shifts of the consumption function can occur when a change occurs in one of the autonomous consumption determinants (expectations, wealth, credit, taxes, price levels). For example, significant positive returns in the stock market can increase consumer wealth which would cause autonomous consumption to increase.