Consider consumption in two periods,
And
)Consumption smoothing implies:
A)if taxes fall today,they will rise tomorrow.
B)people would consume .
C)people would rather consume the average of and .
D)transitory income is zero.
E)people always know their future income and adjust consumption accordingly.

Question

Consider consumption in two periods, 
And 
)Consumption smoothing implies:
A)if taxes fall today,they will rise tomorrow. 
B)people would consume . 
C)people would rather consume the average of and . 
D)transitory income is zero. 
E)people always know their future income and adjust consumption accordingly.

Quizplus · Accepted Answer

Consumption smoothing refers to the idea of maintaining a stable level of consumption over time, despite fluctuations in income. To achieve this, people would rather consume the average of their current and future income, which is represented by option C. Option A is not necessarily true as it depends on individual preferences and circumstances. Option B is too vague and does not capture the essence of consumption smoothing. Option D is incorrect as transitory income can play a role in consumption smoothing. Option E is also incorrect as people do not always have perfect foresight of their future income.

Consider Consumption in Two Periods