Economics • Economic BasicsMedium
What does the 'Permanent Income Hypothesis' formulated by Milton Friedman suggest?
A. Consumer spending is determined solely by current disposable income in a given year
B. Consumers base their consumption choices on their long-term expected average income rather than transitory fluctuations✓ Correct Answer
C. Savings are entirely independent of interest rates and depend only on psychological propensities
D. Government fiscal policy has zero impact on aggregate consumer demand in the short run
💡 Solution & Explanation
Milton Friedman's Permanent Income Hypothesis posits that consumer spending is determined by expected long-term average income rather than volatile, short-term fluctuations in yearly earnings. This framework counters traditional Keynesian views that rely exclusively on current disposable income to predict consumer demand behavior. Transitory income changes under this hypothesis are primarily saved rather than consumed.
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