Jacob consumes the same quantity every period, and expects to live for T more periods. Unexpectedly, he learns that his salary will be permanently reduced by 50% starting next period. His current income is unchanged.
According to the Permanent Income Hypothesis, which of the following statements is correct?

Question

Jacob consumes the same quantity every period, and expects to live for T more periods. Unexpectedly, he learns that his salary will be permanently reduced by 50% starting next period. His current income is unchanged.  
 According to the Permanent Income Hypothesis, which of the following statements is correct?

Answer

Because the salary cut is large, Jacob will no longer smooth consumption across periods.

Answer

Jacob will not change his current consumption because the salary cut only begins next period.

Answer

Jacob will increase his current saving only if the interest rate is positive.

Answer

Jacob will decrease his current consumption and increase his current saving.

Crowdly

Jacob consumes the same quantity every period, and expects to live for T more pe...

Want instant access to all verified answers on learning.monash.edu?