If consumers want consumption to be as constant as possible over their life cycles and income rises gradually over their periods of employment, then if borrowing constraints prevent their wealth from falling below zero:
A) they can achieve constant consumption by borrowing.
B) their consumption in retirement will be higher than it was in earlier parts of the life cycle.
C) their consumption during their younger years will be lower than it will be in later parts of the life cycle.
D) their consumption during their later working years will be higher than it was or will be in other parts of the life cycle.

Question

Quizplus · Accepted Answer

If consumers want consumption to be as constant as possible over their life cycles and income rises gradually over their periods of employment, then their consumption during their younger years will be lower than it will be in later parts of the life cycle. This is because they are unable to borrow to sustain their desired consumption level during their younger years due to borrowing constraints preventing their wealth from falling below zero. As their income rises during their working years, they are able to accumulate wealth and increase their consumption level to match their desired level.

If Consumers Want Consumption to Be as Constant as Possible