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Question
Answer in detail.
What are the objective factors influencing consumption function?
Solution
Objective or Institutional Factors: Psychological factors are external to an individual's behavior. They are also called exogenous factors.
i. Change in income: Income plays an important role in determining the consumption expenditure. Higher income means more consumption and vice versa.
ii. Change in rate of interest: Change in interest rate influences the consumption pattern. An increase in interest will result in fall in consumption expenditure and vice versa.
iii. Change in capital value: In case of capital gain to an individual, consumption will increase and in case of capital loss, consumption will fall.
iv. Fiscal policy: Changes in the fiscal policy of the government influences the consumption pattern. For example, an increase in interest rate will result in fall in consumption and vice versa.
v. Future expectations: If it is expected that in the future income will increase, the consumption will increase and vice versa.
vi. Demographic factors: Demographic factors such as size of population, age group etc. also influence the consumption pattern. For instance, if the population has a greater proportion of children, the demand for baby products would be more.
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