The random-walk theory of consumption predicts that
A)the slope of a line relating C(t+1)to C(t)is equal to 1
B)the slope of a line relating C(t+1) to C(t) is equal to 0
C)the slope of a line relating C(t+1) to C(t) is close to 0
D)the slope of a line relating C(t)to Y(t)is close to 1
E)none of the above

Question

Quizplus · Accepted Answer

The random-walk theory of consumption suggests that changes in consumption are unpredictable based on past consumption levels, implying that the best predictor of future consumption (C(t+1)) is current consumption (C(t)). This leads to a slope of 1 when relating C(t+1) to C(t), indicating a one-to-one relationship where current consumption is a direct predictor of future consumption.

The Random-Walk Theory of Consumption Predicts That