Consumption Theory: Expected Income Dependence
The question asks which consumption theory does NOT link consumption to expected income. Let's analyze the main approaches:
Keynes’ Consumption Theory
This theory, proposed by John Maynard Keynes, states that consumption expenditure is primarily determined by current disposable income. While expectations can influence spending, the core relationship is direct: as current income rises, consumption rises, but by less than the increase in income. It does not explicitly base consumption on long-term or expected future income.
Friedman’s Permanent Income Hypothesis
Milton Friedman's theory suggests that consumption depends on an individual's concept of permanent income, which represents their long-run average expected income. Current income is seen as a sum of permanent income and a temporary component. Therefore, this approach explicitly treats consumption as dependent on expected income.
Life Cycle Hypothesis (LCH)
Developed by Franco Modigliani, the LCH posits that individuals plan their consumption and savings over their entire lifetime to smooth consumption. Consumption is based on the expected income over an individual's entire life (or working life) and their wealth. This approach fundamentally relies on expected future income.
Conclusion
Based on the analysis:
- Keynes’ approach focuses on current income.
- Friedman’s approach focuses on permanent (expected) income.
- The Life Cycle approach focuses on lifetime (expected) income.
Therefore, Keynes’ approach is the one that does not treat consumption as dependent upon expected income.
Important Questions from Macroeconomics
- Real-factor demand-pull inflection can be caused by:
A. Increase in investment
B. Decrease in consumer demand
C. Decrease in imports given the exports
D. Decrease in exports given the imports
E. Decrease in government expenditure without change in tax revenue.
Choose the correct answer from the options given below : Match List-I with List-II:
List-I (Concepts) List-II (Given by) A. Paradox of thrift I. K. Boulding B. Water-Diamond paradox II. A.C. Pigou C. Wage employment paradox III. J.M. Keynes D. Macroeconomic paradox IV. Adam Smith
Choose the correct answer from the options given below:- Which of the followings are the effects of increase in government spending in IS-LM framework in a closed economy?
A. Increase in income by multiplier times government expenditure.
B. Shift in IS curve to the right leading to disequilibrium in money market at given level of interest rate.
C. Quantity of money demand will be higher.
D. Interest rate will decrease.
Ε. Private investment will increase leading to increase in aggregate demand.
Choose the correct answer from the options given below : - If the marginal propensity to consume is 0.8 and initial increase in tax revenues by the government is Rs. 100, then the impact on national income would be:
- Which of the followings are true about New Classical approach.
A. The main protagonist was R.E. Lucas Jr.
B. It is based on adaptive expectation.
C. It was developed during 1950s.
D. Complete wage and price flexibility.
Ε. Difference between actual and expected price is a random error.
Choose the most appropriate answer from the options given below :
