Answer to Question #260451 in Macroeconomics for Kulshegzy

Question

According to the Random-Walk Hypothesis of Consumption under Uncertainty, individuals don’t need to optimise their consumption over time since the consumption is totally unpredictable” True or False? Note that you need to discuss according to the model

Answer 1

Solution:

The statement is true.

 

Changes in consumption are unpredictable because consumers have rational expectations and they spend money at levels that are consistent with their long-term earning expectations. Consumers tend to adjust their consumption according to future income expectations.