Assume you unexpectedly inherit $20,000.Which of the following fits the life-cycle or permanent-income theory of consumption?
A)you buy yourself some blue chip stocks
B)you pay back part of your student loan
C)you spend $600 on a new laptop computer and use the rest to buy government bonds
D)you deposit $1,000 in your checking account and $19,000 in your savings account
E)all of the above

Question

Quizplus · Accepted Answer

The life-cycle or permanent-income theory of consumption suggests that individuals plan their consumption and savings behavior over their lifetime, aiming for a stable consumption level. All the options (A through D) reflect this behavior by either investing, paying off debt, or saving, which are actions consistent with trying to smooth consumption over time.

Assume You Unexpectedly Inherit $20,000