Asked by Jackie Fortner on May 14, 2024
Verified
The Callaway family owns a small bait and tackle shop in a resort town in Wisconsin. An economic recession reduces the number of tourists for one summer, which reduces the family's income for that year. For the Callaway family, their
A) transitory income for the year of the recession likely exceeds their permanent income.
B) permanent income likely exceeds their transitory income for the year of the recession.
C) permanent income will be more affected by the recession than their transitory income.
D) transitory income is unaffected by this situation.
Economic Recession
A temporary slump in economic activities, with reduced trade and industry output, often determined by a continuous fall in GDP over two quarters.
Permanent Income
A theory suggesting individuals base their consumption patterns on their long-term average income rather than their current income.
Transitory Income
Income that is temporary or fluctuating, often not considered stable or predictable for long-term financial planning.
- Recognize the effects of economic fluctuations on income and standard of living.
Verified Answer
TB
Talasila Bharat ChowdaryMay 19, 2024
Final Answer :
B
Explanation :
Permanent income is an estimate of a person's average income over a longer period, while transitory income refers to temporary fluctuations from this average. In the case of the Callaway family, the reduction in income due to a recession is a temporary situation, affecting their transitory income for that year. Their permanent income, which is an average expected over many years, would likely remain higher than the transitory income they receive during the recession-affected year.
Learning Objectives
- Recognize the effects of economic fluctuations on income and standard of living.