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Unit-9: Permanent Income and Life Cycle Hypothesis

5. According to Friedman, the relation between permanent income and consumption is- Notes
(a) Rational (b) Positive
(c) Permanent (d) Temporary
6. According to Friedman, k and Ka are …………………… from each other.
(a) similar (b) different
(c) important (d) none of these

9.2 Life Cycle Hypothesis

Ando-Modiglyani started the life cycle of consumption. According to him, consumption is depending
on the anticipated income of any consumer. The consumption of a personal consumer is depend on
that thing that what is the available resources, what is rate of return on capital, what is the plan of
spend, and in which age that plan make. In the present value of his income involve the income find
from money or asset and find from current or expected.
Its Assumption: Life cycle principle is depend on following assumption:
1. There is no change in the price level of consumer lifetime.
2. The rate of interest is constant.
3. Consumers are not found any assets in heritage and their nibble assets are the result of their
savings.
The aim of a consumer keeps their need maximum in their life time, which further will depend on
the thing that how much available sources and total income in their time. When the life duration of a
person is giving then their consumption and sources are in ratio. But the plan he makes to spend his
sources (income) the law is that in starting years his income increased, in the middle years his income
high and at the time retirement his income becomes low. Therefore, he will dissave or less saving and
consume more in pubertal, more save and less consume in middle age and then consume more than
his income on dissaving in old age. Resultantly, his consumption level is increasing and constant in
whole life, it shows in figure 9.2 by CC curve.
1
Y YY curve show the income flow of that personal consumer in T time period. In the starting duration
1
0
of his life, this shows in figure by T , he borrows CY B quantity of currency for make his consumption
1
0
level CB that is simple. In the middle years of his life, this shows by T T , he save the BYS quantity
2
1
of currency for future and to pay his borrowings. In the last years of his life, which show by T T, it
2
spends the SC Y quantity.
1
1
According to this principle, consumption is the function of
anticipated income in the life duration of any consumer which
depends on his sources. In some sources his current income
(Y ), present value of future anticipated labour income (Y ) and
e
t
Lt
present value of assets (A ) are involved.
t
Consumption function is shows like that:
C = f (V ) …(1)
t
t
Where V = total sources on time t.
t
Further, V = f (Y + Y + A ) …(2) Figure 9.2
e
t t Lt t
Here Y = current income; Y =Present value of future expected labour income in period t; and
e
t
Lt
A = price on t duration of assets.
t
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