Briefly explain why the total spending line is upward sloping, and why its slope is less than 1.
The correct answer and explanation is:
The total spending line is upward sloping because as income increases, total spending also increases. This relationship comes from the basic idea that consumers tend to spend more as their income rises, though at a decreasing rate. The line shows the cumulative effect of consumption and savings in an economy, and as income grows, people can afford to buy more goods and services, which shifts the total spending upwards.
The slope of the total spending line is less than 1 due to the marginal propensity to consume (MPC). The MPC is the proportion of additional income that a household spends rather than saves. In most economies, the MPC is less than 1, meaning that people do not spend all of their income. For instance, if someone gets an extra dollar, they may spend 70 cents and save 30 cents. This is why the total spending line’s slope is less than 1, reflecting the fact that not all income is being used for consumption.
The flatter slope reflects diminishing returns in consumption. As people earn more income, they may prioritize savings or spend on non-essential items, which means that the additional amount of income spent (the MPC) is less than 1. This is a key feature in understanding consumption behavior—individuals spend a smaller percentage of each additional dollar as their income increases.
In summary, the upward sloping nature of the total spending line illustrates that total spending increases as income grows, but the slope is less than 1 because the proportion of income spent tends to decrease with higher income levels.