Consider consumption in two periods, c₁ and c₂ Consumption smoothing implies that: A) if taxes fall today, they will rise tomorrow. B) people would consume c₁ = c₂ C) people would rather consume the average of c₁ and c₂ . D) transitory income is zero. E) people always know their future incomes and adjust consumption accordingly.

Question

Quizplus · Accepted Answer

Consumption smoothing means that individuals would prefer to maintain a steady level of consumption over time, rather than experiencing large fluctuations. Therefore, they would prefer to consume the average of c₁ and c₂ in order to maintain a stable level of consumption across the two periods. Choices A, D, and E are incorrect as they do not accurately reflect the concept of consumption smoothing. Choice B is incorrect because there may be reasons why an individual would want to consume more in one period than another, even if they have the same level of income in both periods.

Consider Consumption in Two Periods, C1 and C2 Consumption Smoothing

Consider Consumption in Two Periods, C₁ and C₂ Consumption Smoothing