The permanent income model implies the same relationship between changes in consumption and income as
A)the backward-looking model.
B)the life-cycle model.
C)the liquidity constraint model.
D)the Keynesian multiplier.
E)None of these

Question

Quizplus · Accepted Answer

The permanent income model is a forward-looking model that assumes individuals' consumption decisions are based on their expected (or 'permanent') income, rather than their current income. This implies that changes in consumption will be gradual in response to changes in income, as individuals adjust their expectations about their future income. This is similar to the life-cycle model, which also assumes that individuals make consumption decisions based on their expected lifetime income. The other models listed do not necessarily have the same relationship between changes in consumption and income.

The Permanent Income Model Implies the Same Relationship Between Changes