Which of the following is a feature of the 'Ratchet Effect' in consumption theory?
A. Consumption rises with income but is resistant to falling when income declines
B. Consumption is independent of past income
C. Only permanent income matters
D. Consumption falls symmetrically with income
Answer: Option A
Solution (By JKSSB Mock Tests)
The ratchet effect, associated with Duesenberry’s relative-income hypothesis, describes the asymmetry whereby consumption adjusts upward more readily than downward when income changes.
Explanation:
Foreign direct investment is a component of the Capital Account. Current Account includes merchandise trade, invisibles (services), and unilateral transfers.
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