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    Question

    Which of the following is a core conceptual pillar

    of Keynes’ fundamental psychological law of consumption regarding the relationship between income and consumption?
    A Consumption increases at a rate higher than the increase in income. Correct Answer Incorrect Answer
    B As income increases, the Average Propensity to Consume (APC) also increases. Correct Answer Incorrect Answer
    C Men are disposed, as a rule and on average, to increase their consumption as their income increases, but not by as much as the increase in their income. Correct Answer Incorrect Answer
    D The Marginal Propensity to Save (MPS) is always equal to the Marginal Propensity to Consume (MPC). Correct Answer Incorrect Answer
    E Total consumption is independent of the absolute level of current income. Correct Answer Incorrect Answer

    Solution

    Keynes’ Fundamental Psychological Law of Consumption (or the Absolute Income Hypothesis) is based on the core observation that consumption is a positive function of income, but the growth in spending does not keep pace with the growth in earnings.  This law states that when aggregate real income increases, aggregate consumption also increases, but by a smaller amount i.e. 0

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