Question

What does Keynes' Psychological Law of Consumption state?

Options

• When income increases, consumption increases by the same amount.

• When income increases, consumption increases but by less than the increase in income.

• When income increases, consumption remains constant.

• When income increases, saving decreases.

Answer 1

When income increases, consumption increases but by less than the increase in income.

Explanation:

According to Keynes, as aggregate real income rises, aggregate consumption also rises, but not by as much as income. This means MPC (Marginal Propensity to Consume) is always less than one.