If permanent income is always taken to equal disposable income in the current year, then a consumption function of the form C = a + bYDp)
A) reveals a long-run marginal propensity to consume that is larger than the short-run marginal propensity to consume.
B) reveals a long-run marginal propensity to consume that is exactly equal to the short-run marginal propensity to consume.
C) reveals a long-run marginal propensity to consume that is smaller than the short-run marginal propensity to consume.
D) defines short- and long-run marginal propensities to consume, to be sure, but insufficient information has been provided to compare them.
E) is difficult to specify in times of uncertain income.

Question

Quizplus · Accepted Answer

If permanent income is equated to disposable income in the current year, the consumption function directly links current consumption to current income. This implies that the marginal propensity to consume (MPC) in the short run is the same as in the long run, since both are based on the same measure of income.

If Permanent Income Is Always Taken to Equal Disposable Income