According to the permanent-income hypothesis, consumption depends primarily on ______ income.
A) current
B) nominal
C) permanent
D) transitory

Question

Quizplus · Accepted Answer

The permanent-income hypothesis suggests that consumption is primarily determined by a person's permanent income rather than their current income. Permanent income is an individual's estimated long-term average income, taking into account fluctuations in income over time. This means that individuals will adjust their consumption patterns based on their expected long-term income rather than short-term changes in income. Therefore, choice C, permanent income, is the correct answer. Options A and D are incorrect because consumption is not influenced by short-term changes in income, also called transitory income. Option B is also incorrect because nominal income does not account for changes in inflation, so it does not provide an accurate estimate of long-term average income.

According to the Permanent-Income Hypothesis, Consumption Depends Primarily on ______