Both the permanent-income and life-cycle hypotheses modify Keynesian consumption theory by distinguishing the effects of
A)temporary and permanent changes in disposable income.
B)changes in the disposable income of upper income and lower income classes.
C)changes in labor income and interest income.
D)small and large changes in disposable income.

Question

Quizplus · Accepted Answer

Both the permanent-income and life-cycle hypotheses modify Keynesian consumption theory by distinguishing the effects of temporary and permanent changes in disposable income. The permanent-income hypothesis posits that people base their consumption on their permanent or long-term income rather than their current income, while the life-cycle hypothesis suggests that individuals plan their consumption over their entire lifetime and, thus, adjust their current consumption based on their expected lifetime income. Both theories are based on the idea that people do not react to temporary changes in their disposable income in the same way they do to permanent changes.

Both the Permanent-Income and Life-Cycle Hypotheses Modify Keynesian Consumption Theory