The intertemporal budget constraint tells us that A) the ...

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The intertemporal budget constraint tells us that
 
  A) the income earned in a lifetime will be evenly divided between consumption and saving.
  B) the present value of lifetime consumption equals the present value of lifetime income.
  C) household consumption is based on permanent income and not transitory income.
  D) consumption smoothing only occurs in years when income is greater than consumption.

Question 2

Suppose you need an estimate of future inflation (to decide, for example, whether a particular security is a good investment). How might you formulate a rational expectation?
 
  What will be an ideal response?

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Answer to Question 1

B

Answer to Question 2

A rational expectation is a best possible guess using all available information. Since any prediction is prone to error, the best strategy is to collect several predictions and, as much as possible, assess the plausibility of the underlying methods, paying particular attention to assumptions about future economic conditions.