Which of the following statements is an accurate statement of an implication of the forward-looking theory of consumption?
A) The marginal propensity to consume tends to be smaller than it would be otherwise because people view at least part of every income change as temporary.
B) Sensitivity of consumption to the interest rate tends to make the IS curve flatter than it would be otherwise.
C) Sensitivity of saving to the interest rate tends to make the marginal propensity to consume smaller than it would be otherwise.
D) The likely effect of the implied reduction in the short-run marginal propensity to consume tends to make the IS curve steeper than it would be otherwise.
E) All of the above.

Question

Quizplus · Accepted Answer

The forward-looking theory of consumption suggests that individuals base their consumption decisions not just on their current income but also on their expectations of future income. This leads to several implications: A) People may view income changes as partly temporary, reducing the marginal propensity to consume. B) Consumption sensitivity to interest rates can flatten the IS curve, as changes in rates affect saving and investment decisions. C) If saving is more sensitive to interest rates, this could also imply a smaller marginal propensity to consume. D) A reduction in the short-run marginal propensity to consume, as implied by the theory, would indeed make the IS curve steeper, as it indicates a lower responsiveness of consumption to changes in income.

Which of the Following Statements Is an Accurate Statement of an Implication