Economics • Economic BasicsMedium
What does the 'Absolute Income Hypothesis' proposed by John Maynard Keynes postulate regarding the relationship between consumption and income?
A. Consumption is a stable, increasing function of current absolute disposable income, with the average propensity to decline as income rises.✓ Correct Answer
B. Consumption depends entirely on expected future lifetime income rather than current income.
C. Consumption depends on the highest level of income achieved previously, showing asymmetry over business cycles.
D. Consumption is determined by permanent income, which excludes transitory income fluctuations.
💡 Solution & Explanation
Keynes' Absolute Income Hypothesis posits that current consumption is determined primarily by current disposable income, with the average propensity to consume declining as income increases. Other hypotheses like the permanent income or life-cycle theories factor in future lifetime earnings and wealth instead.
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