According to the permanent income hypothesis, which situations would result in an immediate increase in consumer spending, which would result in an immediate decrease in consumer spending, and which would result in no change in consumer spending?
i. A new technology is discovered that promises an increase in cheap computing power in the future. As a result, expected income rises. Consumer spending will ______________.
ii. Firms announce that they expect more layoffs next year than were previously anticipated. Expectations for the rest of this year, however, do not change. Consumer spending will ______________.
iii. The government unexpectedly gives each person in the economy an extra $1,000 tax refund. However, everyone in the economy expects that exactly this amount, in present value, will have to be paid back in the future in the form of taxes. Consumer spending will ______________.
iv. Researchers announce that they anticipate a breakthrough in the effectiveness of training for low‑skill workers within the next decade. The new training method will allow these low‑skill workers to quickly and cheaply acquire valuable skills that will then place them in better‑paying jobs. Consumer spending will ______________.
WORD BANK:
- immediately increase
- immediately decrease
- not change