Which one of the following hypotheses postulates that individual's consumption in any time period depends upon resources available to the individual, rate of return on his capital and age of the individual?

The correct answer is C, Life Cycle Hypothesis. Proposed by Franco Modigliani with Richard Brumberg and Albert Ando, it holds that a person plans consumption over a whole lifetime, using available resources, the return on wealth and age. According to the hypothesis, people try to keep their consumption smooth across life. They borrow or spend savings when young and earning little, save during their working years, and run down their wealth after retirement. So how much a person spends now depends on total lifetime resources, the rate of return on capital and the stage of life, exactly as the question describes. Modigliani won the Nobel Prize in Economics in 1985, partly for this work. Option A is wrong because Keynes's Absolute Income Hypothesis links consumption only to current income. Option B is wrong because James Duesenberry's Relative Income Hypothesis says consumption depends on income relative to others and on past peak income. Option D is wrong because Milton Friedman's Permanent Income Hypothesis ties consumption to expected long-run average income, not to age. Exam tip: Keynes, absolute; Duesenberry, relative; Friedman, permanent; Modigliani, life cycle.