Limitations of the Consumption Smoothing Model as an Explanation for a Positive MPC

A household plans its spending to maintain a perfectly stable standard of living throughout the year, using savings and borrowing to manage any income fluctuations. This year, the household receives an unexpected, one-time cash bonus equivalent to one month's salary. According to a theoretical model where this household can perfectly achieve its goal of stable spending, how will this bonus affect its consumption in the current year?

Consider a theoretical household that successfully maintains an absolutely constant, unchanging level of spending from one period to the next. If this household receives an unexpected, temporary increase in its income, it will immediately increase its spending to a new, higher level.

Predicting Spending Behavior

Evaluating Household Spending Behavior

The Logic of Stable Spending and Income Changes