Final answer:
The Permanent Income Hypothesis and the Life-Cycle Hypothesis suggest that consumers smooth consumption over their lifetimes, balancing current consumption with saving for the future. Changes in expected future income can affect both consumption and savings, influenced by individual time preferences and economic outlook.
Step-by-step explanation:
The Permanent Income Hypothesis and the Life-Cycle Hypothesis suggest that consumers tend to smooth out their consumption over their lifetime. They do this by saving during times of high income and drawing down on savings or borrowing during times of low income. People are generally not inclined to spend their entire income without saving for the future but instead prefer to have a balance between current consumption and future consumption. An increase in expected future income can lead to an increase in both current consumption and savings, depending on individual time preferences and how optimistic or pessimistic they are about the future.
When there is an increase in wealth or optimistic expectations about future earnings, people may consume more and save less. Conversely, during economic downturns or when wealth decreases, savings rates are likely to increase as consumption declines. These behaviors highlight the importance of expectations and preferences in determining consumption and saving habits.