Question

Which of the following statements is/are CORRECT in the context of the Absolute Income Hypothesis?

• A. The marginal propensity to consume (MPC) is a constant
• B. As income increases, the average propensity to consume (APC) tends to approach the marginal propensity to consume (MPC)
• C. Average propensity to consume (APC) increases as income increases
• D. Current saving/dis-saving has no bearing on future consumption

Answer 1

The Correct Option is A, B, D

The question asks us to identify the correct statements regarding the Absolute Income Hypothesis (AIH). Let's step through each statement and determine its accuracy.

1. The marginal propensity to consume (MPC) is a constant:
   In the context of the Absolute Income Hypothesis proposed by John Maynard Keynes, it is assumed that the marginal propensity to consume (MPC) is constant for any individual. This is because Keynes suggested a stable relationship between changes in income and consumption with a certain portion of additional income consumed. Therefore, this statement is correct.
2. As income increases, the average propensity to consume (APC) tends to approach the marginal propensity to consume (MPC):
   According to the Absolute Income Hypothesis, as income rises, the proportion of income consumed (APC) decreases, shifting closer to the MPC. This is because as income increases, less is needed for basic consumption, and more can be saved, reducing the APC. Thus, this statement is accurate.
3. Average propensity to consume (APC) increases as income increases:
   This statement is incorrect under the Absolute Income Hypothesis. According to Keynes, as income rises, the APC, which is the ratio of total consumption to total income, tends to decrease because individuals tend to save more as they have more income beyond their basic consumption requirements.
4. Current saving/dis-saving has no bearing on future consumption:
   The Absolute Income Hypothesis assumes that people base their consumption primarily on current income, and savings decisions are irrelevant to their future consumption choices. Therefore, this statement aligns with Keynesian theory and is correct.

Based on the above analysis, the correct statements are:

• The marginal propensity to consume (MPC) is a constant
• As income increases, the average propensity to consume (APC) tends to approach the marginal propensity to consume (MPC)
• Current saving/dis-saving has no bearing on future consumption