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.