Explain why changes in consumption are unpredictable if consumers obey the permanent-income hypothesis and have rational expectations.
The permanent-income hypothesis implies that consumers try to smooth consumption
over time, so that current consumption is based on current expectations about lifetime
income. It follows that changes in consumption reflect “surprises” about lifetime
income. If consumers have rational expectations, then these surprises are unpredictable. Hence, consumption changes are also unpredictable.