If households come to believe that permanent income has not changed ________.
A)the impact of a change in taxes on spending will be limited
B)they will consume on the basis of their current income
C)their life-cycle will be affected
D)the impact of a given change in taxes on spending will be enhanced

Question

Quizplus · Accepted Answer

The permanent income hypothesis suggests that households base their consumption on their long-term income expectations rather than their current income. Therefore, if they believe their permanent income hasn't changed, a change in taxes will have a limited impact on their spending because they will adjust their savings rather than their consumption.

If Households Come to Believe That Permanent Income Has Not