If people can borrow and lend to perfectly smooth out their lifetime living standards, then ?
Correct answer: C. permanent income is a good measure of the distribution of living standards.
- A. transitory income is a good measure of the distribution of living standards
- B. none of these answers
- C. permanent income is a good measure of the distribution of living standards.
- D. life-cycle income is a good measure of the distribution of living standards.
- E. current annual income is a good measure of the distribution of living standards.
Explanation
With perfect borrowing and lending, people can convert income received at different ages into a smooth lifetime consumption path. Permanent income therefore better represents their long-run living standard than current or transitory income.
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