Chapter 16, Problem 3CYU

To determine

The question requires us to determine the impact of expected future disposable income on consumer spending.

Explanation of Solution

A household uses his/her disposable income for consumption purposes and savings.

Two situations are there:

1. When people expect a lower future disposable income, they would like to save some of their current disposable income to smooth their future consumption spending.
2. When people expect a higher future disposable income, they would like to borrow some money from the market to increase their current consumption spending.

If consumers are unable to borrow or save in the market, any change in expected future disposable income will not affect their current and future consumption spending. Consumers will not be able to smooth their consumption spending over time. They will consume all of their current disposable income.