Answer to Question #260443 in Macroeconomics for kimah

Question

Discuss Milton Friedman’s permanent income hypothesis and differentiate it from the life cycle hypothesis and differentiate it from the permanent income hypothesis

Answer 1

The permanent income hypothesis was proposed by Milton Friedman, who believed that consumer spending is a result of predicted future income rather than consumption based on current after-tax income. The liquidity of an individual influence how they handle their income and spending. The LCH is more concerned with saving motivations than the PIH and strongly advocates for integrating wealth and income in the consumption function. On the other hand, the PIH is more concerned with how individuals build expectations about their future earnings than the LCH is.