Empirical Tests of the Forward-Looking Model of Consumption Behavior

question 2

Multiple Choice

Empirical tests of the forward-looking model of consumption behavior

• A) confirm all its implications with household level data.
• B) fail miserably with aggregate data, since aggregation obscures the behavior of individual decision-making units.
• C) show evidence that liquidity constraints cause some households' consumption to be insensitive to temporary income changes.
• D) show evidence that liquidity constraints cause some households' consumption to be overly sensitive to income changes in the short run.
• E) none of the above.

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Definitions:

Complete Stranger

A person whom one does not know or with whom one is not familiar.

Expected Loss

The predicted amount of loss a business might suffer due to risks, calculated as the sum of all possible losses multiplied by their respective probabilities.

Weak Axiom

A principle used in consumer choice theory that stipulates if a consumer chooses bundle A over bundle B when both are affordable, then the consumer should not choose B over A when prices change, holding income constant.

Risk Inconsistency

The phenomenon where an individual's tolerance for risk changes in unpredictable ways over time or across different contexts.