Statements :
I. The current consumption is a function of not only current income, but also the past income.
II. There is asymmetrical relationship between income and consumption during contraction and expansion.
III. Consumption income relationship is irreversible.
IV. Consumption falls less than income during depression, but the rise in consumption is much more during expansion.
Codes :
Duesenberry's Past Income Hypothesis Analysis
James Duesenberry's Past Income Hypothesis (also known as the Relative Income Hypothesis) explains consumption behavior based on past income levels and social comparisons. Let's analyze each statement:
Statement I: Current Consumption Depends on Past Income
This statement is correct. A key element of Duesenberry's theory is that current consumption is influenced not just by current income, but significantly by the highest income previously attained (past peak income). This is often referred to as the "habit formation" or "demonstration effect".
Statement II: Asymmetrical Relationship During Contraction and Expansion
This statement is correct. Duesenberry argued that the relationship between income and consumption is asymmetrical. When income rises, consumption tends to rise proportionally. However, when income falls, consumption tends to fall, but by a smaller proportion, as people try to maintain their established living standards.
Statement III: Irreversible Consumption-Income Relationship
This statement is correct. It directly relates to the asymmetry mentioned above. Once consumption spending has increased due to higher past income, it is "sticky" or irreversible downwards. Consumers are reluctant to reduce their consumption levels significantly even when facing a temporary income drop, leading to a ratchet effect.
Statement IV: Consumption Changes Relative to Income Changes
This statement is correct and elaborates on the asymmetry. During a downturn ('depression'), consumption falls less than income because people dip into savings or reduce savings rate to maintain spending levels. During an expansion, consumption rises, reflecting the adjustment to higher income levels and potentially the desire to "keep up" with peers, reinforcing the established consumption patterns.
Based on the analysis, all four statements accurately reflect the core propositions of Duesenberry's Past Income Hypothesis.
Important Questions from Macroeconomics
- A less elastic IS curve means that :
- In Keynesian framework, at full employment, which of the following is/are true ?
(a) Supply curve in the short period is inelastic.
(b) The supply is influenced by the increase in the quantity of money.
Select the answer from the code given below : - When LM curve is vertical, which one of the following is correct ? An increase in money supply will lead to :
- Crowding out will emerge in the economy, if :
- Which among the following were neglected by Keynes in his theory of employment ?
