If people can smooth out their lifetime living standards by borrowing and lending, then a. current annual income is a good measure of the distribution of living standards b. permanent income is a good measure of the distribution of living standards c. transitory income is a good measure of the distribution of living standards d. life-cycle income is a good measure of the distribution of living standards e. none of the answer choices are correct

Permanent income is a good measure of the distribution of living standards because it reflects individuals' expected long-term average income rather than just their current or temporary earnings. This concept, introduced by economist Milton Friedman, highlights how people may borrow or save to maintain stable consumption despite fluctuations in their immediate income. Additionally, life-cycle income refers to the idea that individuals earn varying levels of income throughout their lives, influenced by factors such as education, career changes, and retirement. By analyzing life-cycle income, one can better understand how people manage their resources, smoothing consumption over time and thereby achieving a more accurate assessment of welfare beyond mere annual income snapshots.