Gordon characterizes Modigliani as a prominent activist yet several implications of his life cycle hypothesis support the non-activists.One of these implications is
A)the real asset effect would dampen and thus stabilize spending.
B)the real asset effect would dampen and thus destabilize spending.
C)the real asset effect would increase and thus stabilize spending.
D)the real asset effect would increase the size of the multiplier.

Question

Quizplus · Accepted Answer

The real asset effect would dampen and thus stabilize spending according to Modigliani's life cycle hypothesis, which suggests that individuals tend to spend less in early adulthood and save more in middle age to prepare for retirement. As individuals accumulate real assets such as homes, their spending behavior is influenced by the value of those assets, which tends to be more stable than their income. This leads to a more stable overall level of spending, rather than erratic or activist behavior.

Gordon Characterizes Modigliani as a Prominent Activist Yet Several Implications