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Until A Theory of Consumption Function, the Keynesian absolute income hypothesis and interpretation of the consumption function were the most advanced and sophisticated. [2] [3] In its post-war synthesis, the Keynesian perspective was responsible for pioneering many innovations in recession management, economic history, and macroeconomics.
Robert Hall was the first to derive the effects of rational expectations for consumption. His theory states that if Milton Friedman’s permanent income hypothesis is correct, which in short says current income should be viewed as the sum of permanent income and transitory income and that consumption depends primarily on permanent income, and if consumers have rational expectations, then any ...
A news shock is a change in current expectations of future technological progress, which could be induced by new information about potential technological developments. In the context of microeconomics, shocks are also studied at the household level, such as health, income, and consumption shocks.
Thus, when income is affected by transitory shocks, for example, agents' consumption should not change, since they can use savings or borrowing to adjust. This theory assumes that agents are able to finance consumption with earnings that are not yet generated, and thus assumes perfect capital markets.
Friedman's research introduced the term "permanent income" to the world, which was the average of a household's expected income over several years, and he also developed the permanent income hypothesis. Friedman thought income consisted of several components, namely transitory and permanent.
Average propensity to consume (APC) (as well as the marginal propensity to consume) is a concept developed by John Maynard Keynes to analyze the consumption function, which is a formula where total consumption expenditures (C) of a household consist of autonomous consumption (C a) and income (Y) (or disposable income (Y d)) multiplied by marginal propensity to consume (c 1 or MPC).
Transitory inflation is a term that gained wide circulation in 2021 as the initial impact of the COVID pandemic subsided and prices for many goods and services began rising steeply after several ...
The latter theory, also known as the "natural rate of unemployment", distinguished between the "short-term" Phillips curve and the "long-term" one. The short-term Phillips curve looked like a normal Phillips curve but shifted in the long run as expectations changed.