Question

Suppose that a family saves and borrows to buffer itself against changes in income. These actions relate to which problem in measuring inequality? a. economic mobility b. in-kind transfers c. transitory versus permanent income d. negative income tax

Answer 1

The Answer to the question is C- Suppose that a family saves and borrows to buffer itself against changes in income. These actions relate to which problem in measuring inequality transitory versus permanent income

A permanent income hypothesis is a theory of consumer spending which states that people will spend money at a level consistent with their expected long term average income. The level of expected long term income then becomes thought of as the level of "permanent" income that can be safely spent. A worker will save only if his or her current income is higher than the anticipated level of permanent income, in order to guard against future declines in income.

The permanent income hypothesis was formulated by the Nobel Prize winning economist Milton Friedman in 1957. The hypothesis implies that changes in consumption behavior are not predictable, because they are based on individual expectations. This has broad implications concerning economic policy. Under this theory, even if economic policies are successful in increasing income in the economy, the policies may not kick off a multiplier effect from increased consumer spending. Rather, the theory predicts there will not be an uptick in consumer spending until workers reform expectations about their future incomes