Answer to Question #220710 in Macroeconomics for fatma

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 explains how people spend and save money throughout the course of their lives. It states that people should try to balance their consumption throughout their lives by borrowing when they have a low income and saving when they have a large income. Permanent Income Hypothesis, on the other hand, states that present consumption decisions are dependent on future income projections. According to this theory, individuals will spend money at a level that is consistent with their predicted long-term average income.