Question

What is the definition of consumption smoothing?

1) A process of maintaining a constant level of consumption over time
2) A process of increasing consumption over time
3) A process of decreasing consumption over time
4) A process of fluctuating consumption over time

Answer 1

Consumption smoothing is the process of maintaining a consistent consumption level over time by utilizing savings and borrowing to offset fluctuations in income.

Step-by-step explanation:

The definition of consumption smoothing is a process of maintaining a constant level of consumption over time, despite fluctuations in disposable income. Individuals utilize strategies like saving and borrowing to achieve this balance, ensuring that periods of high income result in savings, while during low-income periods, they may dissave to maintain their consumption. This concept is a fundamental aspect of the consumption function, which is an equation relating consumption to disposable income and is integral to models of the aggregate economy.