Economics • Economic BasicsMedium
What does the 'Permanent Income Hypothesis' formulated by Milton Friedman state regarding consumer spending?
A. Consumption is determined solely by current disposable income.
B. Consumption is proportional to expected long-term average income rather than transitory income.✓ Correct Answer
C. Consumer spending decreases as national wealth increases due to the paradox of thrift.
D. Savings are entirely independent of income fluctuations over a lifetime.
💡 Solution & Explanation
Milton Friedman proposed the Permanent Income Hypothesis, asserting that individuals base their consumption expenditures on their long-term average expected income rather than short-term fluctuations. Temporary or transitory income changes primarily affect savings rather than immediate consumption behavior.
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