Economics • Economic BasicsMedium
What does the 'Absolute Income Hypothesis', proposed by John Maynard Keynes, postulate regarding consumer behavior?
A. Current consumption depends primarily on current absolute disposable income✓ Correct Answer
B. Consumption depends on the expected permanent income over a lifetime
C. Consumption is determined by the highest income achieved previously
D. Consumption depends on relative income compared to peers
💡 Solution & Explanation
The Absolute Income Hypothesis formulated by John Maynard Keynes asserts that current household consumption depends primarily on current absolute disposable income during the same period. Permanent income and relative income hypotheses were subsequently introduced by Milton Friedman and James Duesenberry to address anomalies in the Keynesian consumption function. This concept forms a cornerstone of classical Keynesian macroeconomics.
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