What does the 'Remedial Income Hypothesis' or 'Absolute Income Hypothesis' primarily fail to account for, which led to the formulation of the Permanent Income Hypothesis?

💡 Solution & Explanation

Keynesian absolute income hypothesis incorrectly predicted that the average propensity to consume would fall as income rose, which conflicted with long-term time-series data showing constancy. This empirical anomaly led Milton Friedman and others to develop alternative frameworks incorporating lifetime income expectations. Understanding consumption functions is foundational for macroeconomics in competitive examinations.