Discussion
When current income includes negative transitory component, relating consumption with current income will produce
Answer: B
When current income includes a negative transitory component, measured current income is below permanent income. Consumption depends on permanent income, so it is high relative to that depressed current income, and the average propensity to consume comes out higher than the long run average propensity. Option A describes the opposite situation, a positive transitory component, when current income is unusually high. Option C would hold only if transitory income were zero. Option D is wrong because the permanent income hypothesis gives a definite answer, which is option B.
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