Consume nondurables out of permanent income

Reference no: EM131161144

In his definition of permanent consumption, Friedman includes the consumption of services provided by durables. Purchases of durables are classified as a form of saving. In an economy similar to that in Exercise 9.6, the variance of transitory income is 0.5 that of permanent income, the propensity to consume nondurables out of permanent income is 0.6, and half of current saving (actual income minus expenditure on nondurables) takes the form of expenditure on durables. What would be the value of the multiplier derived from a naïve regression of consumption on income, and what would be the true value?

Reference no: EM131161144

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