According to the permanent-income hypothesis,a transitory increase in a person's income will
A) increase consumption more than savings.
B) increase savings more than consumption.
C) be smoothed out to where the increases in consumption and savings are roughly equal.
D) have the same effect on consumption as a permanent increase in income.

Question

Quizplus · Accepted Answer

The permanent-income hypothesis suggests that people base their consumption on their expected long-term average income rather than current income. Therefore, a transitory increase in income is more likely to be saved rather than spent, as it does not affect the long-term income expectation.

According to the Permanent-Income Hypothesis,a Transitory Increase in a Person's