Using the neoclassical model of consumption,an implication of the permanent income hypothesis is ___________ because of __________.
A)consumption smoothing;diminishing marginal utility
B)permanent income follows a random walk;aggregate demand shocks
C)wealth is constant;real interest rates are,more or less,constant
D)a low discount factor;the borrowing constraint
E)no borrowing;income in the future is higher

Question

Quizplus · Accepted Answer

The permanent income hypothesis suggests that individuals base their consumption decisions on their long-term average income or permanent income rather than their current income. This leads to consumption smoothing, where individuals save during periods of high income and consume during periods of low income. This is supported by the neoclassical model of consumption, which assumes diminishing marginal utility, meaning individuals receive less satisfaction from each additional unit of consumption. Consuming a steady amount over time is thus more optimal for individuals, and this is achieved through consumption smoothing.

Using the Neoclassical Model of Consumption,an Implication of the Permanent