The permanent-income hypothesis seeks primarily to explain the
A)observed long-term constancy of the saving ratio.
B)observed variation in the short-term saving ratio.
C)unimportance of transitory income changes.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

The permanent-income hypothesis, developed by Milton Friedman, explains not only the long-term constancy of the saving ratio but also accounts for the variations in the short-term saving ratio and the relative unimportance of transitory changes in income. It suggests that individuals base their consumption and saving decisions on their "permanent income," or their long-term average income, rather than their current income. This theory can explain various observed behaviors in saving and consumption patterns over different time frames.

The Permanent-Income Hypothesis Seeks Primarily to Explain the