Which one of the following statements is NOT CORRECT in the context of Keynesian Absolute Income Hypothesis?
Show Hint
- Average Propensity to Consume (APC) plus Average Propensity to Save (APS) is equal to one.
- Marginal Propensity to Consume (MPC) is constant.
- Average Propensity to Consume (APC) increases as income increases.
- Marginal Propensity to Consume (MPC) plus Marginal Propensity to Save (MPS) is equal to one.
The Correct Option is C
Solution and Explanation
The Absolute Income Hypothesis assumes that consumption increases with income but at a decreasing rate. Thus, Average Propensity to Consume (APC) decreases as income increases.
Step 2: Evaluate the statements.
(A) APC + APS = 1 is true by definition.
(B) MPC is constant in the Keynesian model, so this is true.
(C) APC decreases as income increases, so this statement is incorrect.
(D) MPC + MPS = 1 is correct by the definition of marginal propensities.
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