The Permanent Income Consumption Theory

This chapter focuses on the permanent income view of consumption and saving, delving deeply into mechanics and also exploring how taxes can be incorporated into a discussion of consumption and saving. In order to test whether or not stabilization policy based upon tax cuts are robust, a hypothetical scenario is given of a two-period model of a household. The rule of thumb is that consumption over time will be equal to permanent income; a real-world example is given. Sachs explains household expenditure and consumption through current day and future day scenarios, as well as disposable income in the context of permanent income. He concludes with focus on tax cuts and their impact in the future.

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