Assume that consumption and permanent income are derived as shown in equations (15.2) and (15.3). In those equations, let = 0.8 and j = 0.5. Assume that 2010 actual income of $30,000 equals permanent income.
(a) What would be the permanent income for 2011, 2012, and 2013 if actual income for those three years were $36,000, $45,000, and $30,000, respectively?
(b) What would be consumption spending in those three years?
(c) What would be the short-run marginal propensity to consume in each of those three years?
(d) Using the distinction between permanent income and transitory income, explain why the short-run marginal propensity to consume would differ from the long-run marginal propensity to consume in 2011