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

Question

Quizplus · Accepted Answer

The permanent-income hypothesis predicts that individuals will smooth their consumption over time based on their expected permanent income. This is because of diminishing marginal utility, meaning that each additional unit of consumption provides less satisfaction than the previous one. Therefore, individuals will try to spread out their consumption evenly over time to maximize their overall satisfaction.

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