Answer to Question #216544 in Macroeconomics for Leegod

Question

Explain the lifecycle hypothesis of consumption; compare the major differences of this

hypothesis with the permanent income hypothesis of consumption.

Answer 1

The Life-Cycle Hypothesis is an economic theory that describes the spending and saving habits of people over the course of a lifetime. It stipulates that individuals aim to smooth consumption throughout their lifetime by borrowing when their income is low and saving when their income is high. On the other hand, Permanent Income Hypothesis stipulates that current consumption decisions are based on future income expectations. It states that individuals will spend money at a level that is consistent with their expected long-term average income.