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It states that consumption is a function of expected stream of disposable income over a long period of time and present value of wealth. Individuals are assumed to spread out the present value of all future income streams on consumption throughout their lifetime. Therefore, consumption is assumed to be a function of lifetime income. In the early years, consumption is greater than income, the individuals thus borrows to consume and build up on human capital. In the middle years, income is greater than consumption, the individual is thus paying loans and saving for future consumption, investment and bequests. In the late years, consumption is greater than income, the individual is thus consuming out of savings, pension and social security fund. According to the hypothesis, the average propensity to consume is high in the early and late years of an individual’s life. This is why there is non-proportionality in the income and consumption relationship in the short run. In the long run however, the consumption and income relationship is proportional
Dana05 answered the question on July 18, 2019 at 19:53
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