Which of the following is a feature of the 'Permanent Income' versus 'Current Income' debate in consumption theory?
A. The debate has been fully resolved in favour of pure permanent-income theory
B. Empirical evidence shows that consumption is more sensitive to current income than pure permanent-income theory predicts
C. Consumption is completely independent of current income
D. Only permanent income matters and liquidity constraints are irrelevant
Answer: Option B
Solution (By JKSSB Mock Tests)
Empirical studies often find 'excess sensitivity' of consumption to current income, suggesting that liquidity constraints, myopia or other factors cause departures from pure permanent-income behaviour.
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