Let C = 100 + 0.85YDp) represent a consumption function depending on a notion of permanent income YDp) based on some undefined combination of disposable income lagged over the past six years. In this case, the long-run marginal propensity to consume would be
A) 0.85.
B) approximately equal to 0.85 but increased slightly by the lagged structure of permanent income.
C) approximately equal to 0.85 but reduced slightly by the lag structure of permanent income.
D) approximately equal to the lag coefficient of this year's disposable income in the definition of permanent income times 0.85 but reduced slightly by the rest of the lag structure of permanent income.
E) none of the above.

Question

Quizplus · Accepted Answer

The long-run marginal propensity to consume (MPC) is directly given by the coefficient of YDp in the consumption function, which is 0.85. This coefficient represents the change in consumption for a one-unit change in permanent income, regardless of how permanent income is calculated or its lag structure.