According to the permanent income hypothesis, which of the following situations
ID: 1094410 • Letter: A
Question
According to the permanent income hypothesis, which of the following 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? 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 this year, however, do not change. The government unexpectedly gives each person in the economy an extra $1,000 on his or her tax return. 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. Decrease Increase, No change.Explanation / Answer
Cheaper Technology that is going to increase the computing power and income. It shall increase income on permanent basis. Thus, consumer will increase his expenditure on consumption Company is planning layoff. Laypoff is supposed to reduce the income of consumer or employees. it will affect their income in future. There would be decrease in spending. It will not increase the spending since people are apprehensive about the future. Govt may tax heavily in future. consumer will not change their attitude towards expenditure. Better skills to worker would increase income of workers on permanent basis. Hence they will increase spendings.
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