According to Friedman's permanent-income hypothesis, the marginal propensity to consume out of permanent income is ______ the marginal propensity to consume out of transitory income.
A) greater than
B) less than
C) equal to
D) one minus

Question

Quizplus · Accepted Answer

Friedman's permanent-income hypothesis suggests that individuals base their consumption decisions more on their long-term, or "permanent," income expectations rather than on short-term, or "transitory," income changes. Therefore, the marginal propensity to consume out of permanent income is greater than that out of transitory income, as individuals are more likely to save or not immediately spend unexpected, temporary income increases.

According to Friedman's Permanent-Income Hypothesis, the Marginal Propensity to Consume