Economics • Economic BasicsMedium
What does the 'Permanent Income Hypothesis' formulated by Milton Friedman suggest regarding consumer spending?
A. Consumption is determined solely by current disposable income.
B. Consumption depends on long-term expected or permanent income rather than transitory income.✓ Correct Answer
C. Consumption remains a fixed fraction of income regardless of wealth.
D. Consumer spending is entirely driven by government fiscal interventions.
💡 Solution & Explanation
Milton Friedman formulated the Permanent Income Hypothesis, which posits that consumer spending is determined by long-term expected or permanent income rather than fluctuating transitory income. According to this theory, individuals save temporary windfalls and maintain stable consumption patterns based on their expected average lifetime earnings. Incorrect choices refer to Keynesian absolute income theories or constant fraction savings models.
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