Households affected by a "liquidity constraint" have consumption ________ sensitive to changes in current income that is predicted by the LCH,and a saving ratio that may not ________ in a recession.
A)less,rise
B)less,fall
C)more,rise
D)more,fall

Question

Quizplus · Accepted Answer

Households facing liquidity constraints cannot smooth consumption over time as predicted by the Life-Cycle Hypothesis (LCH), making their consumption more sensitive to changes in current income. In a recession, these households may not be able to save more, so their saving ratio may fall.

Households Affected by a "Liquidity Constraint" Have Consumption ________ Sensitive