Full consumption smoothing occurs when:
A) the ratio of income volatility to output volatility is zero.
B) the ratio of consumption volatility to output volatility is exactly 1.
C) the ratio of consumption volatility to output volatility is zero.
D) the ratio of output volatility to expenditure volatility is zero.

Question

Quizplus · Accepted Answer

Full consumption smoothing occurs when the ratio of consumption volatility to output volatility is zero, meaning that changes in income do not lead to changes in consumption. This can be achieved through mechanisms such as savings, borrowing, and insurance. Option A is incorrect because it does not take consumption into account. Option B is incorrect because although consumption volatility may be equal to output volatility, this does not guarantee full consumption smoothing. Option D is incorrect because it does not relate to consumption at all.

Full Consumption Smoothing Occurs When