The hypothesis that individuals base consumption on their expected long run average income is the
A)life cycle hypothesis.
B)forward looking expectation hypothesis.
C)permanent-income hypothesis.
D)None of the above.

Question

Quizplus · Accepted Answer

The hypothesis that individuals base consumption on their expected long run average income is the permanent-income hypothesis, which states that individuals' consumption behavior is determined by their expected long-run average income level rather than their transitory or short-term fluctuations in income. The life cycle hypothesis suggests that individuals save their earnings during their working years to support their consumption needs during retirement, while the forward-looking expectation hypothesis relates to individuals' forward-looking expectations regarding future prices and interest rates.

The Hypothesis That Individuals Base Consumption on Their Expected Long