According to the permanent-income hypothesis, if consumers receive a permanent increase in their salary then they will:
A) save most of it in the current year.
B) spend most of it in the current year.
C) spend one half of it and save one-half of it in the current year.
D) not alter their consumption or saving in the current year.

Question

Quizplus · Accepted Answer

According to the permanent-income hypothesis, consumers base their current consumption decisions on the expectation of their future (permanent) income rather than their current income. Therefore, if they receive a permanent increase in their salary, they are likely to increase their current consumption as well, since they expect their future income to be higher as well. This suggests that they will spend most of it in the current year rather than saving it.

According to the Permanent-Income Hypothesis, If Consumers Receive a Permanent