Q. There are strong theoretical reasons to expect that changes in wealth are responsible for changes in consumption. Nonetheless, one reason that we observe a tight link betweenconsumption and disposable income is... (Solved)

1. credit rationing which changes the intertemporal budget constraint for borrowers.

2. households attempt to smooth their consumption.

3. household saving provides a buffer between income and expenditure.

4. ricardian equivalence.

  • a. credit rationing which changes the intertemporal budget constraint for borrowers.
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