Principles of Macroeconomics / Unit 9 MAC 0812 short lesson, about 20 seconds
Current Income or Permanent Income
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The idea
Two hypotheses compete. The current income hypothesis says consumption follows this period's income. The permanent income hypothesis says it follows the average income households expect over a lifetime.
In practice
A medical student with low income now and high income expected may save nothing and still spend freely.
Where people slip
The two predict differently about temporary income changes, which is what makes them testable.
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