Consumption is most likely to respond one- for- one with changes in current income when:
A) people are able to borrow as much as they wish, as long as they pay it back.
B) the change in current income is caused by the business cycle.
C) people believe the change in their current income is permanent.
D) the change in current income results from a one- time government handout.
E) people believe the change in their current income is temporary.

Question

Quizplus · Accepted Answer

When people believe the change in their current income is permanent, they are more likely to adjust their consumption behavior to reflect the new level of income. This is because they expect their future income and ability to repay any loans to remain at this new level. In contrast, when people believe the change in their current income is temporary, they may save more or maintain their previous level of consumption until their income stabilizes again. Therefore, consumption is most likely to respond one-for-one with changes in current income when the change is believed to be permanent.

Consumption Is Most Likely to Respond One- For- One with Changes