Suppose that your annual income has averaged $40,000 for the past 10 years and that you expect it will average $40,000 over the next 10 years. If your income this year increases to $50,000 but your consumption expenditures don't change, then you are most likely acting according to the
A) transitory income theory of consumption.
B) current income hypothesis.
C) permanent income hypothesis.
D) disposable personal income theory of consumption.

Question

Quizplus · Accepted Answer

The permanent income hypothesis suggests that individuals base their consumption decisions on their permanent or long-term income expectations rather than their current or transitory income levels. In this scenario, the individual expects their income to average $40,000 over the next 10 years, indicating a belief in a permanent income level. This suggests that the individual's increase in income to $50,000 is likely to be seen as a temporary or transitory increase, and thus they do not increase their consumption expenditures accordingly.

Suppose That Your Annual Income Has Averaged $40,000 for the Past