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What distinguishes the short-run consumption function from the long-run consumption function according to the permanent income hypothesis?
- a)Short-run function is based on transitory consumption, while long-run function is based on permanent consumption.
- b)Short-run function is influenced by actual income fluctuations, while long-run function is based on permanent income.
- c)Short-run function is constant, while long-run function varies with business cycles.
- d)Short-run function is based on anticipated future income, while long-run function is based on current income.
Correct answer is option 'B'. Can you explain this answer?
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What distinguishes the short-run consumption function from the long-ru...
The Permanent Income Hypothesis
The Permanent Income Hypothesis (PIH) is an economic theory that suggests individuals base their consumption decisions on their long-run, or permanent, income rather than their short-run, or transitory, income. According to the PIH, individuals aim to smooth their consumption over time and adjust their spending patterns based on their expectations of future income.
Short-Run Consumption Function
The short-run consumption function refers to the relationship between an individual's current income and their current level of consumption. It is influenced by actual income fluctuations and short-term changes in financial circumstances. In the short run, individuals may increase their consumption when their income rises and reduce it when their income decreases.
Long-Run Consumption Function
The long-run consumption function, on the other hand, is based on an individual's permanent income. Permanent income represents the average income an individual expects to earn over an extended period of time. It takes into account predictable changes in income, such as salary increases or decreases, and reflects an individual's long-term financial circumstances.
Distinguishing Factors
According to the PIH, the following factors distinguish the short-run consumption function from the long-run consumption function:
1. Time Horizon: The short-run consumption function focuses on the immediate period and is influenced by current income fluctuations, while the long-run consumption function takes a broader perspective and considers an individual's average income over time.
2. Income Source: The short-run consumption function is based on actual income received, which can be subject to short-term variability. In contrast, the long-run consumption function is based on an individual's perception of their permanent income, which is relatively stable and less affected by short-term income fluctuations.
3. Consumption Smoothing: The short-run consumption function may exhibit more variability as individuals adjust their consumption to match their current income levels. In contrast, the long-run consumption function tends to be smoother and more stable as individuals aim to smooth their consumption over time.
4. Expectations: The short-run consumption function is influenced by individuals' expectations of future income, but it is primarily based on their current income. In contrast, the long-run consumption function is more heavily influenced by individuals' expectations of their permanent income, which includes anticipated changes in income.
Therefore, option B, which states that the short-run consumption function is influenced by actual income fluctuations, while the long-run consumption function is based on permanent income, is the correct answer.
The Permanent Income Hypothesis (PIH) is an economic theory that suggests individuals base their consumption decisions on their long-run, or permanent, income rather than their short-run, or transitory, income. According to the PIH, individuals aim to smooth their consumption over time and adjust their spending patterns based on their expectations of future income.
Short-Run Consumption Function
The short-run consumption function refers to the relationship between an individual's current income and their current level of consumption. It is influenced by actual income fluctuations and short-term changes in financial circumstances. In the short run, individuals may increase their consumption when their income rises and reduce it when their income decreases.
Long-Run Consumption Function
The long-run consumption function, on the other hand, is based on an individual's permanent income. Permanent income represents the average income an individual expects to earn over an extended period of time. It takes into account predictable changes in income, such as salary increases or decreases, and reflects an individual's long-term financial circumstances.
Distinguishing Factors
According to the PIH, the following factors distinguish the short-run consumption function from the long-run consumption function:
1. Time Horizon: The short-run consumption function focuses on the immediate period and is influenced by current income fluctuations, while the long-run consumption function takes a broader perspective and considers an individual's average income over time.
2. Income Source: The short-run consumption function is based on actual income received, which can be subject to short-term variability. In contrast, the long-run consumption function is based on an individual's perception of their permanent income, which is relatively stable and less affected by short-term income fluctuations.
3. Consumption Smoothing: The short-run consumption function may exhibit more variability as individuals adjust their consumption to match their current income levels. In contrast, the long-run consumption function tends to be smoother and more stable as individuals aim to smooth their consumption over time.
4. Expectations: The short-run consumption function is influenced by individuals' expectations of future income, but it is primarily based on their current income. In contrast, the long-run consumption function is more heavily influenced by individuals' expectations of their permanent income, which includes anticipated changes in income.
Therefore, option B, which states that the short-run consumption function is influenced by actual income fluctuations, while the long-run consumption function is based on permanent income, is the correct answer.
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What distinguishes the short-run consumption function from the long-ru...
In the context of the permanent income hypothesis, the short-run consumption function is influenced by actual income fluctuations, while the long-run consumption function is based on permanent income and is less variable over business cycles.
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What distinguishes the short-run consumption function from the long-run consumption function according to the permanent income hypothesis?a)Short-run function is based on transitory consumption, while long-run function is based on permanent consumption.b)Short-run function is influenced by actual income fluctuations, while long-run function is based on permanent income.c)Short-run function is constant, while long-run function varies with business cycles.d)Short-run function is based on anticipated future income, while long-run function is based on current income.Correct answer is option 'B'. Can you explain this answer?
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What distinguishes the short-run consumption function from the long-run consumption function according to the permanent income hypothesis?a)Short-run function is based on transitory consumption, while long-run function is based on permanent consumption.b)Short-run function is influenced by actual income fluctuations, while long-run function is based on permanent income.c)Short-run function is constant, while long-run function varies with business cycles.d)Short-run function is based on anticipated future income, while long-run function is based on current income.Correct answer is option 'B'. Can you explain this answer? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about What distinguishes the short-run consumption function from the long-run consumption function according to the permanent income hypothesis?a)Short-run function is based on transitory consumption, while long-run function is based on permanent consumption.b)Short-run function is influenced by actual income fluctuations, while long-run function is based on permanent income.c)Short-run function is constant, while long-run function varies with business cycles.d)Short-run function is based on anticipated future income, while long-run function is based on current income.Correct answer is option 'B'. Can you explain this answer? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What distinguishes the short-run consumption function from the long-run consumption function according to the permanent income hypothesis?a)Short-run function is based on transitory consumption, while long-run function is based on permanent consumption.b)Short-run function is influenced by actual income fluctuations, while long-run function is based on permanent income.c)Short-run function is constant, while long-run function varies with business cycles.d)Short-run function is based on anticipated future income, while long-run function is based on current income.Correct answer is option 'B'. Can you explain this answer?.
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