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Consumption Smoothing

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Consumption smoothing is a concept used to express the desire of people to have a stable path of consumption.

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People desire to translate their consumption from the longer-term of high income to longer-term of low income to obtain more stability and predictability.

There exits many states of the world, which means there are many possible outcomes that can occur throughout and individual’s life. Therefore to reduce the uncertainty that occurs people choose to give up some consumption today to prevent against and adverse outcome in the future.

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