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Contrasting Responses to Future Income Shocks
Imagine two individuals, Alex and Ben. Both learn today that their income will be permanently lower starting one year from now. Alex is a standard, forward-looking economic agent who prefers a smooth consumption path over their lifetime. Ben, however, exhibits a strong present bias. Contrast the likely immediate response of Alex and Ben to this news in terms of their current consumption and saving. Explain the underlying reasoning for the difference in their behavior.
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Economy
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Contrasting Responses to Future Income Shocks