Life cycle theory of consumption postulates that
(A) Consumption is constant throughout lifetime.
(B) Marginal propensity to consume out of permanent income is small.
(C) Marginal propensity to consume out of transitory income is large.
(D) It emphasizes how to maintain a stable standard of living over the course of life.
Choose the correct answer from the options given below:
Step 1: Comprehend the life cycle theory of consumption.
The life cycle theory of consumption, as put forth by economists such as Ando and Modigliani, posits that individuals plan their lifetime consumption and savings. Consumption choices are influenced by both permanent and temporary income.
Step 2: Evaluate the provided options.
- (A) Consumption remains constant throughout life: This is inaccurate. The theory asserts that individuals base their consumption on their lifetime income, which can vary.
- (B) The marginal propensity to consume out of permanent income is low: This is accurate. The theory suggests individuals are more inclined to consume from their permanent income than from transitory income.
- (C) The marginal propensity to consume out of transitory income is high: This is accurate. The life cycle theory indicates that individuals are more likely to spend temporary income, such as bonuses or unexpected gains, rather than permanent income.
- (D) It highlights methods for sustaining a stable standard of living across one's life: This is accurate. The theory focuses on how individuals manage to smooth their consumption patterns and maintain a consistent standard of living throughout different life phases.
Step 3: Determine the correct answer.
Options (B), (C), and (D) are correct as they accurately reflect the tenets of the life cycle theory of consumption.