According to the permanent income hypothesis,
A) consumption responds only to changes in current income
B) consumption responds more to expected future changes in income than to current income
C) consumption responds more to temporary changes in income than to permanent changes
D) consumption responds more to lifetime income than to current income
E) consumption is a function of previous income

Question

Quizplus · Accepted Answer

The permanent income hypothesis suggests that people's consumption behavior is primarily determined by their expected lifetime income, rather than current income or temporary changes in income. Therefore, choice (D) is the best answer, as it reflects this central proposition of the theory.

According to the Permanent Income Hypothesis