Which of the following have been advanced to explain why estimates of the marginal propensity to consume out of temporary increments in income are too high relative to what the theory predicts?
A) People overspend temporary windfalls because they do not believe that they are temporary.
B) People contract their consumption too far because they are liquidity constrained by their inability to borrow against their expected return to normal income levels.
C) People discount the future significantly when they make their intertemporal consumption decisions.
D) a and b only.
E) a, b, and c.

Question

Quizplus · Accepted Answer

The reasons include: A) People might overspend temporary windfalls due to disbelief in their temporary nature. B) Liquidity constraints can lead to overcontraction of consumption as individuals cannot borrow against expected future income. C) Significant discounting of the future can affect intertemporal consumption decisions, leading to higher current consumption out of temporary income increases.

Which of the Following Have Been Advanced to Explain Why