During a recession the Keynesian consumption theory predicts that the savings rate will ________ and the ________ theory that savings rate will ________.
A)fall;PIH;fall
B)fall;LCH;fall
C)rise;PIH and LCH;fall
D)rise;PIH and LCH;rise

Question

Quizplus · Accepted Answer

Keynesian consumption theory predicts that during a recession, people tend to save more as their disposable income decreases due to unemployment or wage cuts. Therefore, the savings rate will rise. On the other hand, Permanent Income Hypothesis (PIH) and Life-cycle Hypothesis (LCH) both suggest that people will maintain their consumption levels during a recession by drawing on their savings. Hence, their savings rate will fall. Since the question asks for the prediction on savings rate only, C is the best answer as it captures the predictions of both PIH and LCH.

During a Recession the Keynesian Consumption Theory Predicts That the Savings