Economics · Permanent Income Hypothesis
According to Milton Friedman's Permanent Income Hypothesis, the short-run Marginal Propensity to Consume (MPC) is lower than the long-run MPC because:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Permanent income is volatile in the short run while current income remains static
- 2Transitory income has a marginal propensity to consume equal to 1
- 3Consumers adjust consumption primarily to permanent income, treating short-run changes as transitory✓
- 4Consumers respond immediately and fully to short-term temporary income fluctuations
Correct answer
Consumers adjust consumption primarily to permanent income, treating short-run changes as transitory
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