Replacing the simple Keynesian consumption function with the function based on the permanent-income hypothesis results in a ________ short-run multiplier,implying a ________ stable private economy.
A)higher,more
B)higher,less
C)lower,more
D)lower,less

Question

Quizplus · Accepted Answer

The permanent-income hypothesis suggests that consumers base their spending on their expected long-term average income rather than their current income. This leads to a lower short-run multiplier because changes in income have a smaller effect on consumption. Consequently, the economy is more stable as it is less sensitive to short-term fluctuations in income.

Replacing the Simple Keynesian Consumption Function with the Function Based