Economics • Economic BasicsHard
Analyze the implications of the 'Absolute Income Hypothesis' formulated by John Maynard Keynes. Which of the following core assertions defines this consumption function?
A. Current consumption is determined exclusively by current disposable income, and the average propensity to consume falls as income rises✓ Correct Answer
B. Consumption depends entirely on peak historical income levels achieved during past economic cycles
C. Households base their spending decisions on anticipated lifetime earnings rather than transient income shocks
D. Consumer spending remains completely unresponsive to short-term fiscal policy interventions
💡 Solution & Explanation
Keynesian absolute income hypothesis posits that current real consumption is a stable function of current real disposable income, featuring a marginal propensity to consume that is positive but less than one. Consequently, the average propensity to consume declines as income increases in the short run. Permanent income and relative income hypotheses later challenged this by introducing intertemporal choice frameworks. The marginal propensity to save rises correspondingly as income expands under absolute income assumptions.
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