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

Question

Quizplus · Accepted Answer

The idea that a permanent increase in income causes a larger increase in consumption than a temporary change in income is called the permanent income hypothesis. This theory suggests that individuals adjust their consumption based on their expected long-term income rather than their current income. Therefore, a temporary change in income will not have as large of an effect on their consumption as a permanent change.

The Idea That a Permanent Increase in Income Causes a Larger