CA Foundation · Business Economics · Determination of National Income
According to Keynes's psychological law of consumption, when the income of a community rises, its consumption expenditure will:
Consumption rises by less than the rise in income. Keynes's fundamental psychological law says that as income increases, people spend part of the increase and save the rest, so the marginal propensity to consume is positive but less than one.
- ARise by less than the rise in incomeCorrect
- BRise by more than the rise in income
- CRise by exactly the same amount as income
- DFall because saving rises sharply
Explanation
Keynes argued that people increase consumption as income rises, but not by as much as the increase in income, so the MPC lies between 0 and 1. The remainder is saved. Option B would imply MPC above 1, which is not the law.
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