If Permanent Income Is Always Taken to Equal Disposable Income

question 9

Multiple Choice

If permanent income is always taken to equal disposable income in the current year, then a consumption function of the form C = a + bYDp)

• A) reveals a long-run marginal propensity to consume that is larger than the short-run marginal propensity to consume.
• B) reveals a long-run marginal propensity to consume that is exactly equal to the short-run marginal propensity to consume.
• C) reveals a long-run marginal propensity to consume that is smaller than the short-run marginal propensity to consume.
• D) defines short- and long-run marginal propensities to consume, to be sure, but insufficient information has been provided to compare them.
• E) is difficult to specify in times of uncertain income.

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Definitions:

Milton Friedman

An influential American economist known for his strong belief in free-market capitalism and minimal government intervention in the economy.

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