The idea that a permanent increase in income causes a larger increase in consumption than a temporary change in income is called the
A)permanent income hypothesis.
B)Friedman-Lucas theory.
C)Ricardian equivalence theorem.
D)intertemporal substitution effect.
E)steady state theorem.

Question

Quizplus · Accepted Answer

The permanent income hypothesis suggests that people base their consumption decisions on their expectations of their long-term or permanent income rather than their current income. Therefore, a permanent increase in income would cause a larger increase in consumption as people adjust their spending habits accordingly.

The Idea That a Permanent Increase in Income Causes a Larger