According to the current income hypothesis,
A) a change in income regarded as temporary will not affect consumption much since it will have little effect on average lifetime income.
B) regardless of whether a change in disposable personal income is permanent or temporary; people will change consumption by moving along the consumption function.
C) a change in income regarded as permanent will have a greater impact on saving than on consumption.
D) a change in income regarded as temporary will have a greater impact on saving than on consumption.

Question

Quizplus · Accepted Answer

The current income hypothesis states that regardless of whether a change in disposable personal income is permanent or temporary, people will change consumption by moving along the consumption function. This means that people will adjust their current consumption levels based on their current income. However, if the change in income is perceived as permanent, people may increase their average lifetime income expectations and adjust their consumption levels accordingly, leading to a greater impact on saving than on consumption. Therefore, option B is the best choice.

According to the Current Income Hypothesis