The life-cycle theory of consumption implies that
A)the mpc out of wealth is very small
B)the mpc out of permanent income is larger than the mpc out of transitory income
C)a large change in stock values can affect the economy, but the effect is fairly small
D)an individual's mpc out of permanent income changes with age
E)all of the above

Question

Quizplus · Accepted Answer

The life-cycle theory of consumption suggests that individuals plan their consumption and savings behaviour over their lifetime. They aim to smooth consumption across different periods of their life. This implies that the marginal propensity to consume (mpc) out of wealth is small because individuals save wealth for future consumption. The mpc out of permanent income is larger than the mpc out of transitory income because individuals see permanent income as a long-term basis for consumption, while transitory income is seen as temporary and more likely to be saved. Changes in stock values can affect the economy by altering wealth and thus consumption, but the effect is moderated by the tendency to smooth consumption over time. Lastly, an individual's mpc out of permanent income may change with age as their saving and consumption goals evolve. Therefore, all the statements A through D are implications of the life-cycle theory of consumption.

The Life-Cycle Theory of Consumption Implies That