Which one of the following hypotheses postulates that individual's con

Which one of the following hypotheses postulates that individual’s consumption in any time period depends upon resources available to the individual, rate of return on his capital and age of the individual?

[amp_mcq option1=”Absolute Income Hypothesis” option2=”Relative Income Hypothesis” option3=”Life Cycle Hypothesis” option4=”Permanent Income Hypothesis” correct=”option3″]

This question was previously asked in

UPSC CDS-1 – 2019

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The Life Cycle Hypothesis (LCH), developed by Franco Modigliani, postulates that individuals plan their consumption and saving over their entire lifetime. Consumption in any given period is determined by the resources available over their lifetime, which include current income, wealth (accumulated savings/capital), expected future income, and the rate of return on capital. The individual’s age is crucial because it determines their position in the life cycle (e.g., earning years, retirement years) and thus influences saving and consumption patterns based on their lifetime resources.

– Consumption depends on lifetime resources.
– Factors include current income, wealth, future income expectations, rate of return, and age.
– This is the core idea of the Life Cycle Hypothesis.

– Absolute Income Hypothesis (Keynes): Consumption depends solely on current absolute income.
– Relative Income Hypothesis (Duesenberry): Consumption depends on current income relative to the income of others (demonstration effect) or relative to peak past income (ratchet effect).
– Permanent Income Hypothesis (Friedman): Consumption depends on permanent income, which is the expected average long-term income.

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