According to the forward-looking model, consumption
A)reacts mostly to a permanent change in income.
B)reacts mostly to a temporary change in income.
C)reacts equally to permanent or temporary changes in income.
D)is always subject to a liquidity constraint.
E)does not react to either temporary or permanent changes in income.

Question

Quizplus · Accepted Answer

The forward-looking model predicts that consumption reacts mostly to a permanent change in income, as individuals are more likely to adjust their spending habits in response to a sustained increase in income rather than a temporary boost.

According to the Forward-Looking Model, Consumption