As discussed extensively in Chapter 7, income inequality has risen in recent decades in the United States. This question considers the implications for consumption inequality.
(a) Suppose a substantial part of the rise in inequality is due to the rising returns to education, so that more highly educated workers are permanently richer than less educated workers. According to the neoclassical consumption model, what would happen to consumption inequality? Why?
(b) Alternatively, suppose that most of the rise in inequality is due to an increase in the frequency and magnitude of temporary shocks (like unemployment or temporary booms and busts in particular industries). What would happen to consumption inequality in this case? Why?