Which of the following is a feature of the 'Permanent Income' versus 'Current Income' debate in consumption theory?
A. Consumption is completely independent of current income
B. Only permanent income matters and liquidity constraints are irrelevant
C. Empirical evidence shows that consumption is more sensitive to current income than pure permanent-income theory predicts
D. The debate has been fully resolved in favour of pure permanent-income theory
Answer: Option C
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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