According to the Permanent-Income Theory, If Individuals a and B

question 30

Multiple Choice

According to the permanent-income theory, if individuals A and B have the same average annual income but A's income fluctuates greatly from year to year while B receives an almost even flow of income each year, then

• A)A will spend less than B out of permanent income
• B)B will spend less than A out of permanent income
• C)A will weigh current income less heavily in making consumption decisions than B
• D)B will weigh current income less heavily in making consumption decisions than A
• E)A's consumption will always be less than B's

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Definitions:

Intervention Bias

The tendency to intervene or take action when it might not be necessary, often influenced by the belief that doing something is better than doing nothing.

Availability Heuristic

A mental shortcut that relies on immediate examples that come to a given person's mind when evaluating a specific topic, concept, method or decision.

Simulation Heuristic

A cognitive process where individuals predict outcomes based on how easily they can imagine an alternative scenario.

Attention Bias

The tendency of an individual's perception to be affected by their recurring thoughts at the expense of other stimuli.