Question

State J.M. Keynes' Psychological Law of Consumption.

Answer 1

J.M. Keynes' Psychological Law of Consumption:

Explanation: According to the Keynes' Psychological Law of Consumption, with increase in income, consumption also increases but not exactly at the same level. Increase in consumption level will always be less the increase in income level.

Keynes' Consumption Function can be expressed in the following form:

C = a + bYd

where

C = Consumption Expenditure

Yd = Real Disposable Income

ASSUMPTIONS:

1. Existence of free capitalist economy.

2. Economic conditions are normal.

3. Psychological and institutional factors remain constant.

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