Who among the following is likely to have the highest marginal propensity to consume out of current income?
A) a rational consumer who intends to behave strictly according to the permanent income hypothesis
B) a risk averse consumer facing a high degree of uncertainty
C) a low-income consumer facing borrowing constraints
D) a working age consumer looking forward to retirement
E) a wealthy parent who is currently accumulating funds to bequeath to his heirs

Question

Quizplus · Accepted Answer

A low-income consumer facing borrowing constraints is likely to have the highest marginal propensity to consume out of current income, as they may not have access to credit and may need to spend a larger portion of their income on basic needs. A rational consumer who follows the permanent income hypothesis may have a relatively low marginal propensity to consume, as they base their consumption decisions on their expected long-term income rather than their current income. A risk averse consumer may have a lower marginal propensity to consume due to their tendency to save for uncertainty, and a working age consumer looking forward to retirement may also have a lower marginal propensity to consume as they may be saving for retirement. A wealthy parent who is accumulating funds to leave to their heirs will likely have a low marginal propensity to consume as they may prioritize saving for future generations over current consumption.

Who Among the Following Is Likely to Have the Highest