Assume that consumption decisions are made according to the permanent income theory. Which of the following would lead to the largest increase in current consumption?
A) Winning $10,000 in the lottery.
B) Obtaining $10,000 by winning a lawsuit.
C) Getting a one- time $10,000 bonus from your employer.
D) Taking a new job with a salary that is $10,000 higher than your current salary.
E) Inheriting $10,000 from a relative.

Question

Quizplus · Accepted Answer

According to the permanent income theory, consumption decisions are based on a person's expected long-term income rather than their current income. Option D would lead to the largest increase in expected long-term income, therefore leading to the largest increase in current consumption. Options A, B, C, and E would all be considered temporary increases in income and would not have as large of an impact on expected long-term income.

Assume That Consumption Decisions Are Made According to the Permanent