The application of rational expectations to the permanent-income hypothesis implies that information contained in
A)only past income levels will determine permanent income.
B)only past income levels will determine transitory income.
C)only new changes in income that are unanticipated can change permanent income.
D)only new changes in income that are anticipated can change permanent income.

Question

Quizplus · Accepted Answer

The rational expectations approach to the permanent-income hypothesis suggests that individuals form their expectations about future income based on all available information, and thus, only unanticipated changes in income (those not already factored into their expectations) can alter their perception of their permanent income. Anticipated changes are already incorporated into their expectations and thus do not affect their perception of permanent income.

The Application of Rational Expectations to the Permanent-Income Hypothesis Implies