Consumption is most likely to respond oneforone with changes

Consumption is most likely to respond one-for-one with changes in current income when:

Select one:

a. the change in current income results from a one-time government handout.

b. people believe the change in their current income is permanent.

c. people believe the change in their current income is temporary.

d. the change in current income is caused by the business cycle.

e. people are able to borrow as much as they wish, as long as they pay it back.

Solution

The correct choice is b

Explanation : -   If the income shock is permanent,consumption responds one-to-one to the income change.