Economics • Economic BasicsMedium
What does the 'Permanent Income Hypothesis' by Milton Friedman suggest?
A. Consumption depends on current disposable income only.
B. Consumption is determined by individuals' long-term expected average income rather than current income.✓ Correct Answer
C. Consumption remains constant regardless of economic fluctuations.
D. Savings are entirely independent of income levels.
💡 Solution & Explanation
Milton Friedman's Permanent Income Hypothesis postulates that consumer spending is determined by individuals' long-term expected average income rather than volatile fluctuations in their current disposable income. This contrasts with Keynesian absolute income theories which assume consumption depends strictly on current income levels.
More Economics Economic Basics questions
- In macroeconomic growth accounting, how does the 'Golden Rule Level of Capital Accumulation' defined by…
- What is meant by 'Liquidity Trap' in macroeconomic theory?
- What does the 'Baumol-Tobin Model' of the demand for money primarily analyze?
- Examine the theoretical underpinnings of the 'Harrod-Domar Model' of economic growth. What is the primary…
- Consider the structural dynamics of the 'Kuznets Inverted-U Hypothesis' relating economic development to…