Consumption function depend on the real interest rate

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Reference no: EM131000941

Let aggregate consumption be given by: C = 10 + 2(Y-T),

where Y is aggregate income and T is total taxes paid such that Y-T is disposable income.

Do you think this consumption function is a reasonable representation of reality? Specifically:

a) In practice, do we think that there is a linear relationship between C and (Y-T)?

b) Should the consumption function depend on the real interest rate? Why or why not?

c) Augment the given consumption function to incorporate the real interest rate.

Reference no: EM131000941

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