Question

Which of the following is not true about the permanent income theory of consumption

	1	Consumption is a function of current and future income.
	2	The lifetime budget constraint depends directly on the rate of interest.
	3	Agents are unsure about their exact time of death, and are allowed to provide bequests to their children.
	4	Consumer preferences are assumed to exhibit a preference for relatively balanced consumption between the two time periods.

Answer 1

When taking into view the permanent income theory of consumption, option 2 i.e. the lifetime budget contraint deoends directly on the rate of interest, is not true.

The permanent income hypothesis states that consumer spending will be at a level consistent with their expected long term average income. This means that people will spend money based on the permanent level of income they expect to earn in future which will be an average of current and future income. Since, according to the permanent income theory of consumption, the budget constraint of a person depends on permanent income, thus rate of interest will not have any role to play.