The permanent-income hypothesis can reconcile the cross-section and time-series consumption studies by incorporating the reasonable assumption that at any one time many people are rich because they are enjoying unusually high ________ income,causing them to have an unusually ________ saving ratio.
A)permanent,high
B)permanent,low
C)transitory,high
D)transitory,low

Question

Quizplus · Accepted Answer

The permanent-income hypothesis argues that consumers base their consumption decisions on their permanent income rather than their transitory income. Therefore, at any one time, some individuals may experience transitory increases in income due to factors such as bonuses or windfalls. These individuals are likely to have a high saving ratio during this period, which could reconcile the cross-section and time-series consumption studies. Choice C correctly identifies these individuals as having transitory high income and a high saving ratio.

The Permanent-Income Hypothesis Can Reconcile the Cross-Section and Time-Series Consumption