According to Modigliani's life-cycle hypothesis, if a consumer wants equal consumption in every year and the interest rate is zero, then the marginal propensity to consume out of wealth ______ as years ______ decrease.
A) increases; of life remaining
B) decreases; of life remaining
C) increases; until retirement
D) decreases; until retirement

Question

Quizplus · Accepted Answer

With zero interest rate and a desire for equal consumption every year, the marginal propensity to consume out of wealth increases as the years of life remaining decrease, because the consumer has fewer years to spread their wealth over.

According to Modigliani's Life-Cycle Hypothesis, If a Consumer Wants Equal