According to the permanent income hypothesis, households will finance a temporary increase in taxes by: reducing _______ or increasing _____.
A) consumption; saving
B) saving; borrowing
C) permanent income; transitory income
D) transitory income; permanent income

Question

Quizplus · Accepted Answer

Households will finance a temporary increase in taxes by reducing saving or increasing borrowing, according to the permanent income hypothesis. This is because they aim to smooth consumption over time, rather than adjusting it dramatically in response to temporary changes in income or taxes.

According to the Permanent Income Hypothesis, Households Will Finance a Temporary