Question

Answer the following questions:

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

Answer 1

According to Keynes’ psychological law of consumption, although with the increase in the income, the consumption expenditure increases, however, this increase in the consumption is less than the increase in the income. In other words, the rate of increase of consumption is lesser than the rate of increase in income. This is because the consumers do not spend the whole of the increase in their income on consumption. Rather, a part of the increase in the income is saved. Thus, the proportionate increase in the consumption is less than the proportionate increase in the income.