If the permanent-income hypothesis is correct, and if consumers have rational expectations, then changes in consumption over time should be:
A) predictable.
B) unpredictable.
C) mostly positive.
D) mostly negative.

Question

Quizplus · Accepted Answer

According to the permanent-income hypothesis with rational expectations, changes in consumption over time should be unpredictable because consumers smooth their consumption based on their expectations of their lifetime income, adjusting only when they receive new information that was not previously expected.

If the Permanent-Income Hypothesis Is Correct, and If Consumers Have