If you know you are at risk of becoming unemployed, you should:

• A. spend more on luxury goods to boost the economy
• B. increase your savings to prepare for possible income loss
• C. reduce your work hours to avoid stress
• D. ignore the risk and maintain your current financial habits

Answer: (B)

Verified step by step guidance

1. Understand the concept of precautionary saving, which is the idea that individuals save more when they face uncertainty about future income, such as the risk of unemployment.
2. Recognize that if you anticipate a possible loss of income due to unemployment, increasing your savings helps create a financial buffer to cover expenses during periods without work.
3. Evaluate the other options: spending more on luxury goods would reduce savings and increase financial vulnerability; reducing work hours might lower current income and not address future risks; ignoring the risk maintains the status quo and does not prepare for potential income loss.
4. Conclude that the most economically rational response to the risk of unemployment is to increase savings, as this improves financial security and helps smooth consumption over time.
5. Relate this behavior to the broader economic principle that individuals adjust their consumption and saving patterns based on expected changes in income and economic conditions.