Principles of Macroeconomics / Unit 9 MAC 0813 short lesson, about 20 seconds
Testing the Two Hypotheses
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The idea
A temporary income change is the test case. The current income hypothesis predicts consumption rises with it. The permanent income hypothesis predicts almost no response.
In practice
Surveys of a 1992 withholding change found households planning to spend about 43 percent of the temporary gain.
Where people slip
That result sits between the two predictions and refutes the strong form of each.
Your place on the trail
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