Keynesian and Kuznets Consumption Theories Analysis

This question requires evaluating two statements regarding macroeconomic consumption theories.

Statement I: Keynes' Consumption Theory

Statement I asserts that according to Keynes, as income rises, a lower proportion of income is spent on consumption. This aligns with the Keynesian consumption function, which posits that:

• Consumption increases as income increases, but not as much as the income increase.
• The Marginal Propensity to Consume (MPC), the fraction of additional income spent, is positive but less than 1 ($0 < MPC < 1$).
• Consequently, the Average Propensity to Consume (APC), defined as $APC = \frac{C}{Y}$ (where C is consumption and Y is income), decreases as income rises.

Therefore, Statement I is correct.

Statement II: Kuznets' Consumption Theory

Statement II states that according to Kuznets, as incomes rise, the average propensity to save remains fairly stable and constant. Kuznets' empirical research focused on long-term historical data:

• His findings indicated that over extended periods, despite significant increases in real income, the ratio of aggregate consumption to aggregate income (APC) remained relatively constant.
• This implies that the Average Propensity to Save (APS), defined as $APS = \frac{S}{Y}$ (where S is saving), also remained stable and constant.
• This contradicted the short-run Keynesian hypothesis of a falling APC.

Therefore, Statement II is correct based on Kuznets' empirical observations.

Conclusion

Since both Statement I (based on Keynes' theoretical framework) and Statement II (based on Kuznets' empirical findings) are considered correct within their respective contexts, the correct option is that both statements are true.