Both the permanent-income and life-cycle hypotheses make the assumption that people prefer a ________ consumption pattern in the long run,and so have a ________ short-run MPC out of sudden changes in income.
A)smooth,low
B)smooth,high
C)jagged,low
D)jagged,high

Question

Quizplus · Accepted Answer

Both the permanent-income and life-cycle hypotheses assume that people prefer a smooth consumption pattern in the long run, which means their consumption changes slowly over time. Therefore, sudden changes in income will have a low short-run MPC as people are likely to save some of the additional income to smooth out their consumption over time.

Both the Permanent-Income and Life-Cycle Hypotheses Make the Assumption That