Economics • Economic BasicsMedium
What does the 'Permanent Income Hypothesis', proposed by Milton Friedman, suggest about consumer spending behavior?
A. Consumption is determined solely by current disposable income.
B. Consumption depends on expected long-term average income rather than transitory income fluctuations.✓ Correct Answer
C. Consumers spend a fixed proportion of their wealth irrespective of future expectations.
D. Savings are entirely independent of income changes.
💡 Solution & Explanation
Milton Friedman's Permanent Income Hypothesis asserts that consumer spending depends primarily on individuals' long-term expected earnings rather than volatile transitory income shocks. This contrasts with Keynesian absolute income theories which tie consumption solely to current disposable income levels. Macroeconomic consumption theories help explain household saving behavior across business cycles.
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