According to the Life-cycle hypothesis, if a person received a payment roughly equals to her current income her consumption would:
A)roughly double.
B)increase, but not by as much as the increase in income.
C)increase by more than the increase in income.
D)would not increase at all.

Question

Quizplus · Accepted Answer

The Life-cycle hypothesis suggests that individuals plan their consumption and savings behaviour over their life-cycle. They aim to smooth consumption over their lifetime, so if a person receives a payment roughly equal to their current income, they would spread this additional income over many periods. Therefore, their consumption would increase, but not by as much as the increase in income, as they save some of the windfall for future consumption.

According to the Life-Cycle Hypothesis, If a Person Received a Payment