QuestionJune 6, 2025

13. Which statement represents the most substantive critique of the consumption function in our short-run macroeconomic analysis? a) It neglects heterogeneous marginal propensities to consume across income levels b) It disregards wealth effects on consumption decisions c) It overlooks the role of consumer confidence and expectations d) It fails to account for how financial innovation affects saving behavior

13. Which statement represents the most substantive critique of the consumption function in our short-run macroeconomic analysis? a) It neglects heterogeneous marginal propensities to consume across income levels b) It disregards wealth effects on consumption decisions c) It overlooks the role of consumer confidence and expectations d) It fails to account for how financial innovation affects saving behavior
13. Which statement represents the most substantive critique of the consumption function in our short-run macroeconomic analysis? a) It neglects heterogeneous marginal propensities to consume across income levels b) It disregards wealth effects on consumption decisions c) It overlooks the role of consumer confidence and expectations d) It fails to account for how financial innovation affects saving behavior

Solution
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Answer

b) It disregards wealth effects on consumption decisions Explanation 1. Identify the core critique The consumption function in short-run macroeconomic analysis primarily focuses on the relationship between income and consumption. A substantive critique would address a significant oversight or limitation in this model. 2. Evaluate each option a) Heterogeneous marginal propensities to consume across income levels are often considered in more advanced models, but not typically in basic consumption functions. b) Wealth effects are indeed a critical factor that can influence consumption decisions, which is often overlooked in simple consumption functions. c) Consumer confidence and expectations are dynamic factors influencing consumption but are generally outside the scope of basic consumption functions. d) Financial innovation affecting saving behavior is more related to savings than direct consumption.

Explanation

1. Identify the core critique<br /> The consumption function in short-run macroeconomic analysis primarily focuses on the relationship between income and consumption. A substantive critique would address a significant oversight or limitation in this model.<br /><br />2. Evaluate each option<br /> a) Heterogeneous marginal propensities to consume across income levels are often considered in more advanced models, but not typically in basic consumption functions.<br /> b) Wealth effects are indeed a critical factor that can influence consumption decisions, which is often overlooked in simple consumption functions.<br /> c) Consumer confidence and expectations are dynamic factors influencing consumption but are generally outside the scope of basic consumption functions.<br /> d) Financial innovation affecting saving behavior is more related to savings than direct consumption.
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