The classical consumption models (Modigliani’s Life-Cycle hypothesis and Friedman’s Permanent Income hypothesis) tell us that consumption is dependent on life-time income. This is based on the assumptions of credit market access (so we don’t have liquidity constrained individuals) and certainty. In short this means that consumption will only change if income changes, and a temporary income change will cause consumption to rise by less (i.e. MPC is low) than a permanent income change (i.e. MPC is close to 1).

Due to the theory of consumption smoothing – whereby individuals prefer to have similar incomes over two periods (or a lifetime) than extremities in either period – we would expect change in consumption to be low over a lifetime. [...]