According to the statistical model of Ando and Modigliani, it may be possible to explain the reduction in consumption that marked 1973 in terms of
A) a sudden reduction in the long-run marginal propensity to consume.
B) a sudden increase in the short-run marginal propensity to consume.
C) a steep decline in the value of assets in which people hold their wealth.
D) an inability of most consumers to see the temporary nature of the oil shock.
E) an increase in saving caused by individuals wanting to prepare for an anticipated recovery from the oil shock in the medium term.

Question

Quizplus · Accepted Answer

The Ando and Modigliani model, part of the life-cycle hypothesis, suggests that consumption is influenced by the lifetime income and wealth of individuals. A steep decline in the value of assets would directly reduce people's wealth, leading to a reduction in consumption, which aligns with the observed reduction in consumption in 1973.

According to the Statistical Model of Ando and Modigliani, It