Consumption smoothing is possible as long as the output shock is:
A) temporary.
B) permanent.
C) less than 10%.
D) more than the rate of interest.

Question

Quizplus · Accepted Answer

Consumption smoothing is a technique people use to maintain roughly the same level of consumption despite changes in their income. In order to do this, the change in income needs to be temporary. If it is permanent, then consumption smoothing will not work and people will need to adjust their spending habits to match their new income level. The other options (less than 10% and more than the rate of interest) are not relevant to the question of whether consumption smoothing is possible.

Consumption Smoothing Is Possible as Long as the Output Shock