Suppose that people looked upon a $1,000 windfall as 50 percent permanent and 50 percent temporary. The short-run marginal propensity to consume out of that $1,000
A) would be 50 percent because the entire permanent component would be spent in the year it was received.
B) would be slightly higher than 50 percent because all the permanent component and a small part of the temporary component would be spent in the year it was received.
C) would be significantly greater than 50 percent because people always spend at least 50 percent of even a temporary increase and all of a permanent increase.
D) would be approximately 0.91 because that is the estimated "Keynesian" marginal propensity to consume.
E) none of the above.

Question

Quizplus · Accepted Answer

If people view half of the windfall as permanent, they are likely to spend all of that portion in the short run, and if they view the other half as temporary, they might still spend a small part of it, leading to a short-run marginal propensity to consume slightly higher than 50 percent.

Suppose That People Looked Upon a $1,000 Windfall as 50