Which of the following provides an example of decisions that are consistent with the permanent income theory?
A) New retirees do not know that their retirement pensions provide a fixed income for life.
B) An increase in government spending during a recession causes a bigger deficit that year but is not a long-run increase in spending.
C) A one-year tax rebate increases disposable income, but households save most of the rebate.
D) Landlords set rent as a percentage of each renter's income.

Question

Quizplus · Accepted Answer

The permanent income theory suggests that individuals base their consumption on their expected long-term average income rather than their current income. Choice C, where households save most of a one-year tax rebate, aligns with this theory because it implies that households do not view the rebate as a permanent increase in income and therefore choose to save rather than spend the additional funds.

Which of the Following Provides an Example of Decisions That