If Consumers Have Rational Expectations and Follow the Permanent-Income Hypothesis

question 81

Multiple Choice

If consumers have rational expectations and follow the permanent-income hypothesis, their current consumption will increase when:

• A) previously announced tax reductions are implemented.
• B) they receive an anticipated raise.
• C) they receive an unexpected inheritance.
• D) they make the last payment on their automobile loan.

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Definitions:

Prepaid Insurance Expense

An accounting term referring to payments made for insurance coverage before the coverage period starts, recorded as an asset on the balance sheet.

Insurance Policy

A contract between an insurance provider and an individual or entity, offering financial protection against loss or damage as specified in the policy terms.

Adjusting Journal Entry

A record documented at the closing of an accounting cycle to distribute revenues and expenses to the appropriate period they took place in.

General Ledger

A general ledger is a comprehensive record of a company's financial transactions over the life of the organization, serving as the primary source for preparing financial statements.