Question: 2 According to the Permanent Income Hypothesis, how will the paths of borrowing and consumption change in response to: (i) A temporary decrease in income

2 According to the Permanent Income Hypothesis, how will the paths of borrowing and consumption change in response to:

(i) A temporary decrease in income

(ii) A permanent decrease in income

(iii) How would the answers in (i) and (ii) change if the decrease in income is unanticipated? Comment on the size of the marginal propensity to consume and the size of the multiplier.

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