Answer to Question #191345 in Macroeconomics for ndinelago

Question

With a help of a diagram discuss how the permanent income theory of consumption explains the difference between the cross-section and time-series estimates of the Keynesian aggregate consumption function.  

Answer 1

Permanent income theory of consumption states that people spend money at a level consistent with their expected long term average income.

The permanent income theory of consumption explains the difference between the cross-section and time-series estimates of the Keynesian aggregate consumption function in the following ways.

1:In cross-section it considers concepts of propensity to consume such as average propensity to consume and other marginal propensity to consume. It states that consumption changes as income changes. In addition, how the consumption changes in response to change in income depends on the average and marginal propensity to consume.

2:In time-series the theory argues that consumption depends on level of income and how it changes over period of time.