Who is the exponent of the "Permanent income hypothesis" on consumption ?

Question

Accepted Answer

The correct option is 4:

The correct exponent of the "Permanent Income Hypothesis" (PIH) on consumption is Milton Friedman (often abbreviated as Freedman in older literature or tests). Friedman, a Nobel laureate economist, proposed the PIH in his 1957 book, *A Theory of the Consumption Function*. This hypothesis states that a consumer's current consumption expenditure is not determined by their current income alone, but primarily by their "permanent income." Permanent income is defined as the average, long-term expected income that a consumer anticipates receiving over their lifetime. The theory posits that consumers distinguish between permanent (long-term, stable) income and transitory (temporary, unexpected) income, and they smooth their consumption over time in response to permanent changes, while temporary income fluctuations have little impact on current consumption.

The incorrect option is 1 (Mody): Mody is not generally associated with the major classic consumption theories like PIH or the others listed.
The incorrect option is 2 (Keynes): John Maynard Keynes proposed the fundamental Psychological Law of Consumption, which states that consumption is primarily a stable function of current absolute income (the Absolute Income Hypothesis), a concept that the PIH was developed to challenge and refine.
The incorrect option is 3 (Duesenberry): James Duesenberry is known for the Relative Income Hypothesis, which suggests that an individual's consumption depends not only on their absolute income but also on their income relative to others (demonstration effect) and their previous peak consumption (ratchet effect).