Question: According to both PIH and LCH, consumption depends on some measure of average or expected income rather than current income.
(A) Explain why this would be the case most of the time.
(B) In what circumstances would you expect it not to be the case?
(C) Both of these theories predict that the personal saving rate declines in recessions. Yet it actually increases. What accounts for this discrepancy?
(D) Both theories also rely on wealth as a determinant of consumption. Explain the situations under which a change in wealth would affect consumption, and the situations when it would not.