Which of the following is NOT consistent with the Permanent Income Hypothesis?

A) The theory would predict that people's consumption would be greater than their income until their mid to late 20s
B) A person who won the lottery would spend only a small part of their winnings in the first year
C) Consumption is smaller than income when people reach old age
D) People gear their consumption to their expected earnings more than to their current income

Question

Lotte Gertler · Accepted Answer

Final Answer : C, Explanation :  The Permanent Income Hypothesis suggests that people plan their consumption based on expected lifetime income rather than current income. Therefore, consumption should not necessarily be smaller than income in old age, as people would have planned their consumption to smooth out over their lifetime.

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