Final answer:
The terms for the blanks in the income and consumption relationship model are 'temporary', 'larger', and dependent on whether the anticipated change in income is positive or negative. Households engage in consumption smoothing to maintain consistent levels of consumption over time.
Step-by-step explanation:
The relationship between income and consumption can be described by several key insights. For part a, a temporary change in income leads to a smaller change in consumption, as households tend to prioritize consumption smoothing and may save the extra income for future use. For part b, a permanent change in income usually leads to a larger change in consumption, as the household adjusts its consumption levels in line with the expectation of sustained higher income. Lastly, for part c, an anticipated change in income influences consumption depending on whether individuals expect their income to increase or decrease. Optimism about future income may lead to increased consumption and vice versa.
The five insights into the relationship between income and consumption can be summarized as follows:
A temporary change in income leads to a small change in consumption.
A permanent increase in income leads to an increase in consumption.
An anticipated change in income leads to a change in consumption.
Consumer expectations about future income affects consumption.
A rise in wealth can result in a higher share of income being consumed and less savings.
In part f, the best word to explain the prior insight is optimistic.