The intertemporal budget constraint tells us that
A) the income earned in a lifetime will be evenly divided between consumption and saving.
B) the present value of lifetime consumption equals the present value of lifetime income.
C) household consumption is based on permanent income and not transitory income.
D) consumption smoothing only occurs in years when income is greater than consumption.

Question

Quizplus · Accepted Answer

The intertemporal budget constraint states that the present value of lifetime consumption equals the present value of lifetime income. This means that individuals must balance current and future consumption and saving decisions in a way that ensures they don't overspend today at the expense of future consumption. It also implies that saving is deferred consumption, and that individuals should smooth consumption over time to ensure stable levels of wellbeing.

The Intertemporal Budget Constraint Tells Us That