The Keynesian income hypothesis states that individuals tend to consume a larger portion of their income when their income increases. This means that as people earn more money, they are likely to spend more of it, leading to an increase in overall consumption.



The permanent income hypothesis, proposed by Milton Friedman, suggests that individuals base their consumption decisions on their perceived long-term average income rather than their current income. According to this hypothesis, changes in income that are perceived as temporary will not lead to significant changes in consumption behavior.



The life cycle hypothesis, developed by Franco Modigliani, argues that individuals plan their consumption and savings over their entire lifetime rather than just based on their current income. This hypothesis suggests that people save during their working years to support their consumption during retirement.

Key points of the Life Cycle Hypothesis:
- Individuals aim to maintain a stable level of consumption throughout their lifetime.
- Savings are used to smooth out consumption levels during different life stages.
- People tend to borrow when they are young to finance education and major purchases, then save during their working years, and finally draw down their savings during retirement.
- The life cycle hypothesis helps explain why people save and borrow at different stages of their lives, taking into account their expected future income and consumption needs.