Economics • Economic BasicsHard
What does the 'Permanent Income Hypothesis' proposed by Milton Friedman suggest about consumer spending?
A. Consumers base their consumption entirely on their current disposable income.
B. Consumption is determined by individuals' long-term expected average income rather than transitory income changes.✓ Correct Answer
C. Savings are zero during periods of unexpected economic growth.
D. Aggregate consumption is directly proportional to government tax rates.
💡 Solution & Explanation
Milton Friedman propounded the Permanent Income Hypothesis, asserting that individuals base their consumption expenditures on their long-term expected or permanent income rather than fluctuating transitory earnings. Temporary income windfalls are predominantly saved rather than consumed immediately. This theory fundamentally challenged Keynesian absolute income consumption models.
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