According to the life-cycle and permanent-income hypotheses, if future income rises permanently, current consumption:
A) falls.
B) rises.
C) does not change.
D) changes in proportion to interest rate changes.
E) Not enough information is given.

Question

Quizplus · Accepted Answer

Both the life-cycle and permanent-income hypotheses suggest that individuals will increase their current consumption if they expect a permanent increase in their future income. This is because they will feel more financially secure and able to afford higher levels of consumption. Therefore, the answer is (B) – rises.

According to the Life-Cycle and Permanent-Income Hypotheses, If Future Income