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Question
Write explanatory answer
State and explain J.M. Keynes's ‘psychological law of consumption’.
Solution
Keynesian psychological law of consumption explains the relationship between consumption (C) and income (Y).
According to J. M. Keynes, "as aggregate income increases, the total consumption expenditure in the economy also increases, but in a proportion less than the increase in the income."
As income increases, the individual wants are satisfied to a larger and larger extent. So, when income increases further, people do not consume the entire income. So, they save a part of it. Hence there is bound to be a gap between income and consumption.
Thus, according to Keynes, with the increase in income, both consumption and savings increases but consumption increases at a diminishing rate and savings increase at an increasing rate.
Explanation of the law :According to keynes as income increase, the individual is able to satisfy more and more wants. However, when the income is increased, the entire income is not spent on consumption instead, people save a part of it which results into a gap b/w income and consumption.
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