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Unit-9: Permanent Income and Life Cycle Hypothesis

5. Many Variables: This principle is depend on many variables like current income, future Notes
anticipated labour income, value of assets and life. It is very hard to assume it. So it is
unrealistic. Despite these things, life-cycle principle is great from those all Theories, that are
already described, because there are involve only assets as variable within consumption
function, and it also clear that thing that why MPC < APC in short duration and APC remain
constant.

Self Assessment
State whether the following statements are True or False:
6. This hypothesis of Friedman is unrealistic that the temporary parts of consumption and
income have no any relation.
7. The principle of Friedman says that the APC of poor and rich are not same in long period.
8. The permanent income principle of Friedman is according to oblique hole budget.
9. Ando-Modigliani started the life cycle hypothesis of consumption.

9.3 Summary
y The permanent income principle of Friedman is according to oblique hole budget. Long period
data shows the proportionate relation between income and consumption. But it is find out by
the study of the fluctuation related income by short period balance way that measure income
and measure consumption are non-proportionate related.

9.4 Keywords

y Earner—one who earns money.
y Over time—long period.

9.5 Review Questions

1. What do you understand by the permanent income hypothesis?
2. What do you know about life cycle hypothesis?
3. What are the assumptions of life cycle principle?

Answers: Self Assessment
1. consumption expenses 2. increment or decrement 3. (a) 4. (b)
5. (a) 6. (b) 7. True, 8. False
9. True 10. True

9.6 Further Readings

Books 1. Macroeconomics: Economic Growth, Fluctuations and Policy— H. Paipal.
Robert E. Hall and David
2. Macroeconomics: Theory and Policy— H. L. Ahuja, S. Chand Publisher, 2010.
3. The Necessity of Macroeconomics—H. S. Nath, Sayber Tech Publisher 2012.

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