ECS 1601 ASSIGNMENT 3 AND 4

3.1 Which of the following statements is correct? [1] At any point below the 45-degree line, aggregate spending is greater than production and income. [2] At any point below the 45-degree line, aggregate spending is less than production but greater than income. [3] At any point below the 45-degree line, aggregate spending is greater than income but smaller than production. [4] At any point below the 45-degree line, aggregate spending is less than production and income. The 45-degree line shows the equality between the variable measured on the vertical axis and the variable measured on the horizontal axis. Left of equilibrium spending is more than production. There is excess demand ECS1601/101/3/2020 3 3.2 Which of the following statements is incorrect? [1] Induced consumption does not require income. [2] People always consume even if income is zero. [3] Consumption increases by less than the increase in income. [4] There is no relationship between consumption and interest rates. The Consumption Function ▪ Consumption increases as income increases. ▪ Consumption is positive even if income is zero (there are non-income determinants – people will spend savings or use credit if their income is 0. This is the autonomous consumption). ▪ When income increases, consumptio