Suppose a person's preferences are to "consumption smooth",which means they wish to get $C _ { 1 } = C _ { 2 }$ for all incomes and interest rates.For any interest rate and $Y _ { 1 }

Question

Suppose a person's preferences are to "consumption smooth",which means they wish to get $C _ { 1 } = C _ { 2 }$ for all incomes and interest rates.For any interest rate and $Y _ { 1 } < Y _ { 2 }$ ,the person will ____ in the first period.
A)borrow
B)save
C)neither borrow nor save

Quizplus · Accepted Answer

Since the person's preference is to consume smooth, that means they prefer to have the same consumption in both periods. If their income in the first period is lower than in the second period, they will need to borrow in order to maintain the same level of consumption in both periods. Therefore, the person will borrow in the first period to achieve consumption smooth preferences.

Suppose a Person's Preferences Are to "Consumption Smooth",which Means They C1=C2C _ { 1 } = C _ { 2 }C1​=C2​

Suppose a Person's Preferences Are to "Consumption Smooth",which Means They $C _ { 1 } = C _ { 2 }$