Both the PIH and the LCH predict that
A)the sum of saving and consumer durable purchases should increase in relation to personal income in booms and fall in recessions.
B)the sum of saving and consume nondurable purchases should increase in relation to personal income in booms and fall in recessions.
C)the sum of saving and consumer durable purchases should decrease in relation to personal income in booms and increase in recessions.
D)saving should increase in relation to personal income in booms and fall in recessions,but that consumer durables tend to behave in a more stable manner over a cycle.

Question

Quizplus · Accepted Answer

The Permanent Income Hypothesis (PIH) and the Life-Cycle Hypothesis (LCH) both suggest that individuals smooth their consumption over time. In booms, when income is temporarily high, individuals save more and might also invest in durable goods, anticipating future periods when income might be lower. Conversely, in recessions, they might draw on their savings or reduce saving rates to maintain their consumption levels. Thus, both saving and spending on durables are expected to be higher relative to personal income in booms and lower in recessions.

Both the PIH and the LCH Predict That