Why does an anticipated change in income lead to no change in consumption for a consumption smoother?
A)The consumer is not aware of anticipated changes in future income.
B)Consumption is based on permanent income, which is already factored into anticipated future changes in income.
C)There are high tax rates on anticipated changes in future income.
D)There is a failure of the permanent income hypothesis.

Question

Quizplus · Accepted Answer

The consumption smoother is based on the permanent income hypothesis, which assumes that consumption is determined by expected permanent income rather than current income. Anticipated changes in future income are already factored into permanent income, so there is no need for a change in consumption when income changes in the future.

Why Does an Anticipated Change in Income Lead to No