Discussion
According to Milton Friedman Theory of permanent component of consumption-expenditure depends on
I. Transitory income alone
II. Transitory and permanent income
III. Permanent income alone
IV. Windfall gains
Answer: D
According to Milton Friedman, the permanent component of consumption expenditure depends on permanent income alone, which is statement III, option D. In the permanent income hypothesis, permanent consumption is a stable proportion of permanent income, and transitory income, such as windfall gains, goes mainly into saving, so it has no effect on the permanent component. Statements I, II and IV bring transitory income or windfall gains into the determination of permanent consumption, which the theory denies, so options A, B and C are wrong.
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