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.