In the basic consumption function used in macroeconomics, how are income and consumption generally related?

Introduction / Context:
The relationship between income and consumption is central to macroeconomic analysis. The consumption function describes how much households plan to consume at different levels of income. In simple models, consumption is assumed to increase as income increases, although not necessarily one for one. This question asks what kind of relationship exists between income and consumption.

Given Data / Assumptions:

• Consumption refers to household spending on goods and services for current use.
• Income refers to disposable income available to households after taxes and transfers.
• In basic models, other influences on consumption such as wealth, expectations, and interest rates are held constant.
• The consumption function is usually written as C = a + bY, where a is autonomous consumption and b is the marginal propensity to consume.
• The marginal propensity to consume is positive but less than one.

Concept / Approach:
In the standard consumption function, consumption is positively related to income. As income rises, households are able to increase their spending on goods and services. The relationship is direct but not proportional, because households also save part of the additional income. Graphically, the consumption function slopes upward from left to right, showing that higher levels of income are associated with higher levels of consumption. Therefore, income and consumption are generally directly related in the basic macroeconomic framework.

Step-by-Step Solution:
Step 1: Recall the basic linear consumption function C = a + bY, where Y is income.Step 2: Note that b, the marginal propensity to consume, is positive, which means that when income increases, consumption also increases.Step 3: On a graph with income on the horizontal axis and consumption on the vertical axis, the consumption curve slopes upward.Step 4: Recognise that this upward slope indicates a direct relationship between income and consumption.Step 5: Compare this with an inverse relationship, which would require consumption to fall when income rises, something not assumed in basic models.Step 6: Conclude that the correct description is that income and consumption are directly related.

Verification / Alternative check:
Empirical studies and household surveys often show that as people incomes rise, their spending on goods and services also rises, although the fraction of income spent on necessities may fall. This supports the view that consumption increases with income even if the composition changes. Macroeconomic textbooks use this observed pattern to justify the assumption of a positively sloped consumption function and to derive the multiplier process in income determination.

Why Other Options Are Wrong:
Option b claims that income and consumption are only partially related and otherwise independent, which is vague and does not capture the clear positive relationship assumed in basic theory. Option c states that they are inversely related, which would imply that higher income reduces consumption, an assumption not used in simple consumption models. Option d claims that they are completely unrelated, which clearly contradicts both theory and empirical evidence. Option e restricts the relationship to firms, but the consumption function is specifically about households, not firms.

Common Pitfalls:
Students sometimes confuse total consumption with consumption on specific items and may think that consumption of some goods falls as income rises, such as inferior goods. While this can be true for particular goods, the overall level of consumption spending generally rises with income. To answer questions like this, it is important to focus on total consumption expenditure in basic macroeconomic models rather than on demand for individual products.

Final Answer:
Income and consumption are generally directly related, so higher income usually leads to higher consumption.