Economics • Economic BasicsMedium
Which of the following best describes the 'Permanent Income Hypothesis' formulated by Milton Friedman?
A. Consumers base their consumption solely on their current disposable income.
B. Consumption is determined by a person's long-term expected average income rather than current income.✓ Correct Answer
C. Consumers save a fixed percentage of their income regardless of economic fluctuations.
D. Consumption is inversely related to interest rates in the short run.
💡 Solution & Explanation
Milton Friedman's Permanent Income Hypothesis suggests that individuals base their consumption on their long-term permanent income rather than transitory income fluctuations. This contrasts with Keynesian absolute income theories which emphasize current disposable income. Macroeconomic consumption theories are standard conceptual items in economics optional and general studies papers.
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