The Permanent Income Theory

The Permanent Income Theory - The Permanent Income Theory C...

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Unformatted text preview: The Permanent Income Theory C C T C P A B Z D E Y (Income) C E C D C A C B C Z Slope = MPC T Slope = MPC P According to Milton Friedman, when income changes in the short run people are often not sure whether they can expect to make the same amount of money in the future. When we look at the population by income level we observe that many people who are either in the bottom tenth or top tenth of the income distribution are not in those groups in the next year apparently they were experiencing either really bad or good circumstances. Some types of spending require people to make a longer term commitment - houses and cars for instance. A person needs to be sure that he or she will be able to make the future payments for which they obligate themselves. With regard to the above graph, suppose your income is at level A. You have a good year and your income increases to B. Should you buy a bigger house? A new car? If you do that, will you be able to make the payments in future years?...
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This note was uploaded on 04/04/2012 for the course ECON 200H taught by Professor Staff during the Winter '11 term at Ohio State.

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The Permanent Income Theory - The Permanent Income Theory C...

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