Consumption smoothing is a logical consequence of ________.
A)basing decision-making on real rather than nominal interest rates
B)the convexity of indifference curves and the ability to borrow and lend
C)the negative slope fo the intertemporal budget constraint
D)rational expectations

Question

Quizplus · Accepted Answer

Consumption smoothing is the process of maintaining relatively constant levels of consumption over time, despite fluctuations in income or expenses. This is possible due to the convexity of indifference curves which indicates that individuals prefer a smooth consumption path to a highly volatile one. Additionally, the ability to borrow and lend enables individuals to shift consumption across time periods, further allowing for consumption smoothing.

Consumption Smoothing Is a Logical Consequence of ________