Which statement best defines the permanent income hypothesis? Consumer spending depends on the level of disposable income that people expect to have over the course of their lifetime. When in a recession, although current consumer spending can be observed, future consumer spending cannot be predicted due to an unknown number of people leaving their temporary recession jobs for higher‑paying, permanent jobs that better fit their skills. Consumer spending depends on both the income and wealth of people in the economy. Consumer spending is proportional to the ratio of people in stable full‑time employment (that is, with "permanent" income) and people in unstable part‑time employment (that is, with "temporary" income). According to the permanent income hypothesis, which situations would result in an immediate increase in consumer spending, which would result in an immediate decrease in consumer spending, and which would result in no change in consumer spending? (Word bank in image) A new technology is discovered that promises an increase in cheap computing power in the future. As a result, expected income increases. Firms announce that they expect more layoffs next year than were previously anticipated. Expectations for the rest of this year, however, do not change. The government unexpectedly gives each person in the economy an extra $1,000 tax refund. However, everyone in the economy expects that exactly this amount (in present value) will have to be paid back in the future in the form of taxes. Researchers announce that they anticipate a breakthrough in the effectiveness of training for low‑skill workers within the next decade. The new training method will allow these low‑skill workers to quickly and cheaply acquire valuable skills that will then place them in better‑paying jobs.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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This question has two parts and concerns the permanent income hypothesis.

Which statement best defines the permanent income hypothesis?

Consumer spending depends on the level of disposable income that people expect to have over the course of their lifetime.

When in a recession, although current consumer spending can be observed, future consumer spending cannot be predicted due to an unknown number of people leaving their temporary recession jobs for higher‑paying, permanent jobs that better fit their skills.

Consumer spending depends on both the income and wealth of people in the economy.

Consumer spending is proportional to the ratio of people in stable full‑time employment (that is, with "permanent" income) and people in unstable part‑time employment (that is, with "temporary" income).

According to the permanent income hypothesis, which situations would result in an immediate increase in consumer spending, which would result in an immediate decrease in consumer spending, and which would result in no change in consumer spending?

(Word bank in image)

A new technology is discovered that promises an increase in cheap computing power in the future. As a result, expected income increases.
Firms announce that they expect more layoffs next year than were previously anticipated. Expectations for the rest of this year, however, do not change.
The government unexpectedly gives each person in the economy an extra $1,000 tax refund. However, everyone in the economy expects that exactly this amount (in present value) will have to be paid back in the future in the form of taxes.
Researchers announce that they anticipate a breakthrough in the effectiveness of training for low‑skill workers within the next decade. The new training method will allow these low‑skill workers to quickly and cheaply acquire valuable skills that will then place them in better‑paying jobs.

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