A young college graduate is earning $30,000 per year and would like to borrow $20,000 more for a down payment on a house,but is prevented from doing so by a "liquidity constraint." For her,transitory income is likely to be ________ in its entirety,producing an MPC out of transitory income ________ that predicted by the LCH.

Question

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The liquidity constraint prevents the individual from borrowing against future income, leading to a higher marginal propensity to consume (MPC) out of transitory income than predicted by the Life-Cycle Hypothesis (LCH), as the individual is likely to consume a significant portion of any transitory income due to the inability to borrow.

A Young College Graduate Is Earning $30,000 Per Year and Would