Both the Permanent-Income and Life-Cycle Hypotheses Make the Assumption That

question 38

Multiple Choice

Both the permanent-income and life-cycle hypotheses make the assumption that people prefer a ________ consumption pattern in the long run,and so have a ________ short-run MPC out of sudden changes in income.

• A)smooth,low
• B)smooth,high
• C)jagged,low
• D)jagged,high

---

Definitions:

Risky Securities

Financial instruments that carry a high degree of investment risk due to their significant exposure to market volatility.

Diversifiable Risk

The risk that a borrower will not pay theinterest and/or principal on a loan as it becomes due. Ifthe issuer defaults, investors receive less than the promised return on the bond. Default risk is influenced byboth the financial strength of the issuer and the terms ofthe bond contract, especially whether collateral has beenpledged to secure the bond. The greater the default risk,the higher the bond’s yield to maturity.

Required Rate

The minimum annual percentage return an investment must earn to be considered a viable option.

Nondiversifiable Risk

A type of investment risk that cannot be mitigated or eliminated through portfolio diversification, often associated with market-wide risks.