Suppose a permanent increase in disposable income were received by individuals with 25 years of working lifetime ahead of them before 10 years of retirement. If they expected positive real interest rates to prevail over the foreseeable future, then forward-looking consumption theory would predict a marginal propensity to consume of
A) something less than 0.6 depending on expected real rates of interest.
B) exactly 0.6 regardless of the real rates of interest.
C) something over 0.6 but invariant to the real rates of interest.
D) something over 0.6 depending on the real rate of interest.
E) something over the "Keynesian" estimate of 0.91, but unspecified because of insufficient information.

Question

Quizplus · Accepted Answer

Forward-looking consumption theory predicts that individuals will consume more in the present if they expect to have higher future income. In this case, individuals with 25 years of working lifetime ahead of them before 10 years of retirement are expected to have a higher future income. Therefore, they will consume more in the present, leading to a marginal propensity to consume of something over 0.6 depending on the real rate of interest.

Suppose a Permanent Increase in Disposable Income Were Received by Individuals