If Derek is a consumption smoother and has just signed a contract for a new job that will increase his salary by 14%, we can expect Derek to exhibit:
A)a large change in consumption.
B)a small change in consumption.
C)zero change in saving.
D)no change in MPC.

Question

Quizplus · Accepted Answer

Consumption smoothing suggests that individuals tend to gradually adjust their consumption over time to changes in their income, rather than making abrupt changes. Therefore, we can expect Derek to exhibit a small change in consumption, rather than a large one. The increase in salary may lead to a gradual increase in his consumption over time, but it is unlikely to be immediate or drastic. This increase in income may lead to a slight increase in saving, depending on Derek's preferences and the specifics of his financial situation, but we cannot assume that there will be zero change in saving or no change in MPC based on this information alone.

If Derek Is a Consumption Smoother and Has Just Signed