Friedman's Permanent Income Hypothesis: Consumption & Long-Term Income

According to Friedman's permanent-income hypothesis, the marginal propensity to consume out of permanent income is equal to the marginal propensity to consume out of transitory income. This means that individuals' consumption behavior is influenced by their expectations of future income rather than their current income. They are more likely to adjust their consumption patterns based on changes in their long-term income prospects rather than short-term changes in their income.