The idea that a permanent increase in income causes a larger increase in consumption than a temporary change in income is called the
A) Friedman-Lucas theory.
B) permanent income hypothesis.
C) Ricardian equivalence theorem.
D) intertemporal substitution effect.
E) steady state theorem.

Question

Quizplus · Accepted Answer

The permanent income hypothesis suggests that individuals base their current consumption decisions not solely on their current income, but also on their expected future income. Therefore, a permanent increase in income would result in a larger increase in consumption compared to a temporary increase since individuals would adjust their long-term consumption patterns. The other listed options are unrelated to this concept.

The Idea That a Permanent Increase in Income Causes a Larger