The permanent income hypothesis is a theory that attempts to explain consumer spending. It states that people’s spending is not only dependent on the current level of income but also the future’s income levels. It means the level of expected future income is considered when the current spending is decided ( Gerlach-Kristen, 2014) . An employee can only save if the current income that he or she earns is higher than the permanent income expected. The aim is to guard against any future declines in income. The notion developed in the theory is that even if there is an increase in the economy, consumer spending will not increase unless the people reform the expectations they have of their future incomes ( Baker & Yannelis, 2017) .
In the application of the permanent income hypothesis, if the worker anticipates that he or she may receive an increase in income, then he may increase his spending in advance. The anticipated increase in income can encourage additional spending in some while others may increase their saving ( Gerlach-Kristen, 2014) . In case an individual is to receive an inheritance, then he or she may maintain the current spending to save the assets that he or she is to receive ( Tapsin & Hepsag, 2014) . The individual may also seek to invest the supplemental funds as a way of providing long-term growth instead of spending the funds immediately on products and services that are disposable.
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The liquidity of a person is important in the future income expectations that he or she has. In case an individual has no assets, then he or she may be in the habit of spending without considering his income levels both currently and in the future ( Tapsin & Hepsag, 2014) . Changes in the permanent income can be realized if the person is in anticipation of future financial stability ( Baker & Yannelis, 2017) . The escalation of the expectation may lead to an increase in spending.
References
Baker, S. R., & Yannelis, C. (2017). Income changes and consumption: Evidence from the 2013 federal government shutdown. Review of Economic Dynamics , 23 , 99-124.
Gerlach-Kristen, P. (2014). Testing the permanent income hypothesis for Irish households, 1994 to 2005. The Economic and Social Review , 45 (4, Winter), 511-535.
Tapsin, G., & Hepsag, A. (2014). An analysis of household consumption expenditures in EA-18. European scientific journal , 10 (16).
