Economics • Economic BasicsMedium
What does the 'Permanent Income Hypothesis' proposed by Milton Friedman suggest?
A. Consumption is determined by an individual's long-term expected average income rather than current disposable income✓ Correct Answer
B. Consumption is strictly proportional to current disposable income in all time periods
C. Savings are solely determined by current interest rates and independent of future earnings
D. Aggregate consumption depends entirely on government transfers and tax policies
💡 Solution & Explanation
Milton Friedman proposed the Permanent Income Hypothesis in 1957, asserting that individuals base their consumption habits on their long-term expected average earnings rather than transient shocks to disposable income. Unlike theories that tie spending strictly to current earnings, this model accounts for consumption smoothing over a lifetime. Understanding this hypothesis is essential for analyzing fiscal policy multipliers in Indian economy questions.
More Economics Economic Basics questions
- Which of the following terms describes a market situation where there is only a single buyer for a particular…
- What does 'Externalities' refer to in microeconomics?
- In the framework of regional economic accounting, how does the estimation of Gross State Value Added at basic…
- What does the 'Hicksian Demand Function' isolate compared to the 'Marshallian Demand Function'?
- Which of the following best defines the concept of 'Opportunity Cost' in microeconomics?