The life-cycle hypothesis and the permanent-income hypothesis both assume that consumers seek to:
A) increase consumption during expansions.
B) minimize consumption during recessions.
C) increase consumption during retirement
D) smooth consumption over their lifetimes.

Question

Quizplus · Accepted Answer

Both the life-cycle hypothesis and permanent-income hypothesis suggest that consumers prefer to smooth their consumption over their lifetimes by borrowing when young and saving when older, in order to maintain a stable level of consumption. These theories assume that consumers aim to maintain a constant standard of living over time, rather than increasing or decreasing consumption during economic expansions or recessions. While retirement may be a factor in these hypotheses, the primary focus is on overall lifetime consumption smoothing.

The Life-Cycle Hypothesis and the Permanent-Income Hypothesis Both Assume That