Consider two individuals, both aiming to maintain a stable level of consumption throughout their lives. Person A is a medical student who expects a significantly higher income after graduation. Person B is a professional athlete in their peak earning years, who expects a much lower income after retirement. Which of the following statements best analyzes their likely financial behaviors based on this goal?

Comparing Financial Strategies

Comparing Consumption Smoothing Strategies

An individual who takes on debt to finance their current education, with the expectation of a higher future income, is acting contrary to the principle of maintaining a stable level of consumption over time.

Match each individual's scenario with the corresponding description of how they would shift purchasing power to maintain a stable lifestyle.

The Rationality of Borrowing and Saving

An individual's financial history shows that they took out loans to fund their university education and a down payment on their first home. Later in their career, they began to save a significant portion of their higher income in a retirement fund. Which statement best analyzes this individual's behavior over their lifetime?

An office worker with a stable, predictable annual salary receives a large, unexpected, one-time bonus. To maintain a relatively consistent standard of living over time, which of the following actions and corresponding rationales is most appropriate?

The Unifying Principle of Borrowing and Saving

A farmer's income is highly concentrated in the few months following the annual harvest, with very little income during the rest of the year. To maintain a consistent standard of living, the farmer saves a large portion of the harvest income and draws from those savings during the off-season. How does this behavior relate to the actions of a recent graduate who takes out a loan to buy a car, anticipating a rising salary in their new career?