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The permanent income hypothesis (PIH) is a model in the field of economics to explain the formation of consumption patterns. It suggests consumption patterns are formed from future expectations and consumption smoothing .
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 ...
The permanent income hypothesis was developed by Milton Friedman in the 1950s in his book A theory of the Consumption Function. This theory divides income into two components: Y t {\displaystyle Y_{t}} is transitory income and Y p {\displaystyle Y_{p}} is permanent income, such that Y = Y t + Y p {\displaystyle Y=Y_{t}+Y_{p}} .
Suppose, consumption and disposable income are macroeconomic time series that are related in the long run (see Permanent income hypothesis). Specifically, let average propensity to consume be 90%, that is, in the long run C t = 0.9 Y t {\displaystyle C_{t}=0.9Y_{t}} .
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.
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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).
The federal government income tax collected by the IRS applies to all Americans regardless of where you live, but the rules for state income tax rates and how you pay taxes can be vastly different ...