With reference to the consumption function C = C̄ + cY, which of the…

With reference to the consumption function C = C̄ + cY, which of the following statements is NOT correct?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → C̄ is the part of consumption that rises as income rises.

In C = C̄ + cY, consumption has two parts. C̄ is autonomous consumption, which does not depend on income. cY is induced consumption, which rises with income.

Option (1) c, the slope of the consumption function, is the marginal propensity to consume. — True. c is the slope of the consumption line and it is the MPC.

Option (2) C̄ is the part of consumption that rises as income rises. — False. C̄ is the part that is independent of income. It stays the same when income rises.

Option (3) When income rises by Re 1, induced consumption rises by c. — True. Each extra rupee of income raises induced consumption by the MPC, c.

Option (4) cY is induced consumption, which shows the dependence of consumption on income. — True. cY grows with Y, so it shows how consumption depends on income.

NCERT (2026-27): “4.1.1 Consumption The most important determinant of consumption demand is household income. A consumption function describes the relation between consumption and income. The simplest consumption function assumes that consumption changes at a constant rate as income changes. Of course, even if income is zero, some consumption still takes place. Since this level of consumption is independent of income, it is called autonomous consumption. … Autonomous consumption is denoted by C̄ and shows the consumption which is independent of income. If consumption takes place even when income is zero, it is because of autonomous consumption. The induced component of consumption, cY shows the dependence of consumption on income. When income rises by Re 1. induced consumption rises by MPC i.e. c or the marginal propensity to consume. It may be explained as a rate of change of consumption as income changes. …”

“Consumption Function – Graphical Representation Using the same logic, the consumption function can be shown as follows: Consumption function, where, C̄ = intercept of the consumption function c = slope of consumption function = tan α …”