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B Com Exam  >  B Com Test  >  Macro Economics  >  Test: Relative & Permanent Income Hypothesis - B Com MCQ

Relative & Permanent Income Hypothesis - Free MCQ Practice Test with solutions,


MCQ Practice Test & Solutions: Test: Relative & Permanent Income Hypothesis (10 Questions)

You can prepare effectively for B Com Macro Economics with this dedicated MCQ Practice Test (available with solutions) on the important topic of "Test: Relative & Permanent Income Hypothesis". These 10 questions have been designed by the experts with the latest curriculum of B Com 2026, to help you master the concept.

Test Highlights:

  • - Format: Multiple Choice Questions (MCQ)
  • - Duration: 10 minutes
  • - Number of Questions: 10

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Test: Relative & Permanent Income Hypothesis - Question 1
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In the context of the permanent income hypothesis, permanent consumption is:

Detailed Solution: Question 1

Permanent consumption, as per the permanent income hypothesis, is determined by permanent income. It is the amount a household can consume while keeping its wealth intact, based on the present value of anticipated future income.

Test: Relative & Permanent Income Hypothesis - Question 2
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According to Friedman's permanent income hypothesis, transitory consumption is influenced by:

Detailed Solution: Question 2

Transitory consumption, like transitory income, is influenced by fluctuations in transitory income. It is regarded as unanticipated consumption, such as unexpected bills, and is not directly related to permanent income.

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Test: Relative & Permanent Income Hypothesis - Question 3
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According to the relative income hypothesis, consumption is influenced by:

Detailed Solution: Question 3

The relative income hypothesis suggests that consumption depends on current income relative to previous peak income. This means that both current income and the income attained in the past play a role in influencing consumption patterns.

Test: Relative & Permanent Income Hypothesis - Question 4
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How does the permanent income hypothesis predict households' reactions to changes in income?

Detailed Solution: Question 4

The permanent income hypothesis predicts that households will increase consumption proportionally only for permanent income changes, as consumption is determined by permanent income rather than actual income.

Test: Relative & Permanent Income Hypothesis - Question 5
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The permanent income hypothesis suggests that households base their consumption on:

Detailed Solution: Question 5

According to the permanent income hypothesis, households base their consumption decisions on their permanent income, which is the amount they can consume while keeping their wealth intact.

Test: Relative & Permanent Income Hypothesis - Question 6
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Which assumption of the permanent income hypothesis has been criticized by economists?

Detailed Solution: Question 6

Economists have criticized the assumption of a constant average propensity to consume in the permanent income hypothesis. They argue that households with low levels of permanent income are under more pressure to consume, leading to a declining average propensity to consume as permanent income increases.

Test: Relative & Permanent Income Hypothesis - Question 7
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What distinguishes the short-run consumption function from the long-run consumption function according to the permanent income hypothesis?

Detailed Solution: Question 7

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.

Test: Relative & Permanent Income Hypothesis - Question 8
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What are the implications of the permanent income hypothesis for policy measures like tax rebates?

Detailed Solution: Question 8

According to the permanent income hypothesis, households base their consumption on permanent income. Tax rebates and temporary changes in taxes have larger impacts when interpreted as temporary changes in income, as households adjust their consumption patterns based on whether the changes are perceived as permanent or transitory.

Test: Relative & Permanent Income Hypothesis - Question 9
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How does the permanent income hypothesis explain the difference in consumption during peak and trough of business cycles?

Detailed Solution: Question 9

According to the permanent income hypothesis, consumption is influenced by permanent income. During the peak of a business cycle, when actual income is higher than permanent income, consumption is relatively lower. During the trough, when actual income is lower than permanent income, consumption is relatively higher.

Test: Relative & Permanent Income Hypothesis - Question 10
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Which hypothesis is likely to have a larger impact on consumption during economic downturns?

Detailed Solution: Question 10

The permanent income hypothesis suggests that consumption is primarily influenced by permanent income. During economic downturns, households may be more inclined to maintain their consumption patterns based on their permanent income expectations, leading to a larger impact on consumption according to this hypothesis.

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About this B Com Practice Test

This test contains 10 MCQs on Relative & Permanent Income Hypothesis with detailed solutions for each question. It is part of the Macro Economics course on EduRev, designed to align with the current B Com syllabus. Each solution explains not just the correct answer but also gives you an understanding of the topic — not just to attempt the question but also help you prepare for the exam with practice.

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