Question

According to Modigliani’s Life-Cycle Hypothesis (LC

  • C out of this windfall will be:
  • H , if an individual receives an unexpected one-time cash windfall late in their working life, their Marginal Propensity to Consume (MP
A Equal to 1, because consumption equals current disposable income
B Significantly higher than the MPC out of permanent income changes
C Relatively small, approximately equal to 1/T, where T is the remaining years of life expectancy
D Zero, because consumers save 100% of temporary gains under rational expectations
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