Answer to Question #244481 in Macroeconomics for Zarah

Question

Make a comparative assessment of the consumption behavioural theories of life cycle hypothesis and the permanent income hypothesis.

Answer 1

The Live Cycle Hypothesis (LCH) pays more attention to the motives for saving than the Permanent Income Hypothesis (PIH) does and argues strongly in favour of including wealth as well as income in the consumption function. The PIH, on the other hand, pays more attention to the way in which individuals form expectations about their future incomes than the LCH does.