0
$\begingroup$

The question is as below

enter image description here

The answer is A. I understand why it is A, but do not understand why it isn't C. Doesn't the point where the consumption line and 45 degrees line intersect represents the equilibrium income level?

$\endgroup$
  • 1
    $\begingroup$ No it doesn't. Please consider rereading the model. $\endgroup$ – Giskard Jan 9 '17 at 13:45
2
$\begingroup$

For most people consumption does not equal income. Many consume less (they save) and others consume more (they take on debt) than they earn. In an economy with financial markets and heterogeneous consumers, discounted lifetime income should equal discounted lifetime consumption, but there is no reason why consumption should equal income at every point in time.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.