In the summer of 2001, tax rebate checks of $300 per single taxpayer and $600 for married couples were distributed to 92 million people in the U.S. Economic researchers found that over a nine-month period spending increased to about 40% of the rebate. These findings support
A) the permanent income hypothesis.
B) the current income hypothesis.
C) the transitory income hypothesis.
D) the consumption function.

Question

Quizplus · Accepted Answer

The current income hypothesis suggests that individuals base their consumption decisions on their current income, rather than their long-term income or savings. The findings that spending increased by about 40% of the tax rebate support this hypothesis, as individuals were likely using the extra money from the rebate to boost their current income and increase their consumption. The other given answer choices do not fit as well with these findings. The permanent income hypothesis suggests that individuals base their consumption decisions on long-term income expectations, which may not be affected by a one-time tax rebate. The transitory income hypothesis suggests that individuals base their consumption decisions on temporary fluctuations in income, which may also not be directly affected by a one-time rebate. The consumption function is a more general theory of how consumption is related to income, but it does not specifically address the impact of a tax rebate on spending.

In the Summer of 2001, Tax Rebate Checks of $300