In the permanent-income hypothesis incorporating rational expectations,the actual cyclical pattern of consumption in the United States is too ________ to justify the assumption that a current change in income ________.
A)smooth,is a poor guide to future income changes
B)volatile,is a poor guide to future income changes
C)smooth,leads to a gradual change in permanent income
D)volatile,leads to a gradual change in permanent income

Question

Quizplus · Accepted Answer

The permanent-income hypothesis incorporating rational expectations assumes that individuals base their consumption decisions on their expected permanent income, which is a measure of their long-term ability to consume. However, if the actual cyclical pattern of consumption is too volatile, it suggests that individuals are not accurately predicting their future income, which would undermine the assumption that a current change in income is a good guide to future income changes. Therefore, option B, which states that the actual cyclical pattern of consumption in the United States is too volatile to justify the assumption that a current change in income is a poor guide to future income changes, is the best choice.

In the Permanent-Income Hypothesis Incorporating Rational Expectations,the Actual Cyclical Pattern