Hall's random walk-theory of consumption states that consumption tomorrow should equal
A)income tomorrow minus income today plus some random error
B)income today minus consumption today plus some random error
C)consumption today plus some random error
D)permanent income plus some random error
E)income tomorrow plus some random error

Question

Quizplus · Accepted Answer

DHall's random walk theory of consumption, also known as the permanent income hypothesis, suggests that consumption patterns are primarily determined by an individual's long-term average income rather than by current income. This theory posits that changes in consumption from one period to the next are unpredictable (random) because they are based on new information that was not previously available. Therefore, options C and D are correct as they both align with the idea that consumption is based on a stable component (either consumption today or permanent income) plus a random component that accounts for new, unpredictable information.

Hall's Random Walk-Theory of Consumption States That Consumption Tomorrow Should