The random-walk theory of consumption asserts that changes in consumption arise from unexpected changes in income.This approach
A)clearly contradicts Modigliani's theory
B)clearly contradicts Friedman's theory
C)contradicts Modigliani's theory but supports Friedman's theory
D)supports Modigliani's theory but contradicts Friedman's theory
E)supports Modigliani's and Friedman's theories

Question

Quizplus · Accepted Answer

The random-walk theory of consumption aligns with both Modigliani's life-cycle hypothesis and Friedman's permanent income hypothesis, as it suggests that consumption changes are based on new information, consistent with the idea that consumers smooth consumption based on expected lifetime resources.

The Random-Walk Theory of Consumption Asserts That Changes in Consumption